                      128 T.C. No. 1



                 UNITED STATES TAX COURT



             JULIE A. TOTH, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos. 12452-04, 12862-04.    Filed January 18, 2007.



     P began operating a horse boarding and training
facility for profit in 1998. P has continued carrying
on these activities through the date of trial. P
claims the expenses paid for these activities are
deductible pursuant to sec. 212, I.R.C., in 1998 and
2001, the years at issue.

     R denied the deductions, claiming that the
expenses were nondeductible startup expenditures under
sec. 195(a), I.R.C., which must be capitalized because
they were incurred in anticipation of the sec. 212,
I.R.C., activity’s becoming a trade or business.

     Held:    Sec. 195(a), I.R.C., does not require the
expenses of   P’s sec. 212, I.R.C., activity to be
capitalized   as startup expenditures. The expenses paid
or incurred   in the sec. 212, I.R.C., activity are
deductible.
                               - 2 -


     Russell R. Kilkenny, for petitioner.

     Shirley M. Francis, for respondent.



     HAINES, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes for 1998 and 2001 (years at

issue) of $112,461 and $84,388, as well as additions to tax under

section 6651(a)(1) of $19,512 and $13,920, under section

6651(a)(2) to be computed, and under section 6654(a) of $3,806

and $2,349, respectively.

     The issue for decision as framed by the parties is:     whether

petitioner may deduct expenses in connection with her horse

boarding and training activities for the years at issue pursuant

to section 212 or instead is required by section 195(a) to

capitalize them as startup expenditures.1

                         FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Petitioner lived in

Oregon when she filed her petition.

     Petitioner was employed by the pharmaceutical firm Pfizer,

Inc. (Pfizer), from 1988 to May 9, 2000.    In March 1997,


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended. All Rule references are
to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated. Amounts are rounded to the nearest dollar.
                              - 3 -

petitioner fell from her horse during a stadium jumping clinic

and suffered a head injury which caused continuing episodes of

severe fatigue, mental apathy, dizziness, and nausea.2    Her

illness resulted in permanent disability and caused her to lose

her job with Pfizer on May 9, 2000.

     Petitioner is one of six individuals in the Pacific

Northwest qualified to teach Eventing3 at the beginning novice,

novice, training, and preliminary levels.4   In 1998 petitioner

purchased 17 acres of land in Newberg, Oregon (Newberg property),

between Portland and Salem, Oregon, in an area well known within

the equestrian community for horse boarding, training, and

lessons.

     In 1998, petitioner began operating a horse boarding and

training facility upon the Newberg property for profit.    Although

income from the activities in 1998 was modest, it gradually

increased as improvements were made to the Newberg property and

petitioner was able to hire additional staff.   By early 2004,



     2
       Petitioner was initially diagnosed with chronic fatigue
syndrome. However, in June 2001, a cardiologist diagnosed her as
suffering from neurocardiogenic syncope, an incurable disease
caused by the nerve damage she suffered from her head injury.
     3
       Eventing is an Olympic sport made up of three disciplines
in which a horse and rider compete in dressage, stadium jumping,
and cross-country jumping.
     4
       Eventing has six levels of difficulty which are in order
of difficulty: Beginning novice; novice; training; preliminary;
intermediate; and advanced.
                                - 4 -

petitioner had established a limited liability company called

Ghost Oak Farm, L.L.C., to operate the Newberg property.    She

currently earns approximately $3,000 per month from Ghost Oak

Farm, L.L.C.

     Petitioner filed her Federal income tax returns for the

years at issue on April 5, 2004.    Respondent sent petitioner

notices of deficiency for the years at issue on April 19 and 26,

2004, respectively.    The notices of deficiency for the years at

issue were based upon third party payor information and not upon

information reported on petitioner’s filed returns.

     The parties have stipulated that the income reported on

petitioner’s Federal income tax returns for 1998 and 2001 is

correct.    Petitioner’s claimed itemized deductions are not in

dispute.    Petitioner reported the income and expenses from her

horse boarding and training activities on Schedule C, Profit or

Loss From Business, but concedes that the expenses attributable

to the activities are not deductible pursuant to section 162.

Rather, petitioner contends that the horse boarding and training

expenses are deductible pursuant to section 212.    Respondent

concedes petitioner engaged in horse boarding and training

activities for profit5 beginning in 1998 and does not dispute the




     5
         Respondent does not argue the application of sec. 183.
                                      - 5 -

amounts of the expenses claimed, but contends they are

nondeductible startup expenditures under section 195(a).6

     Petitioner filed her petitions for 1998 and 2001 on July 21

and 15, 2004, respectively.       The Court consolidated the cases for

trial, briefing, and decision on December 5, 2005.

                                  OPINION

     The relevant portion of section 195, as amended, provides:

     SEC. 195. START-UP EXPENDITURES.

          (a) Capitalization of Expenditures. Except as
     otherwise provided in this section, no deduction shall
     be allowed for start-up expenditures.

                          *   *   *    *   *   *   *

          (c) Definitions. For purposes of this section--

               (1) Start-up expenditures. The term “start-up
          expenditure” means any amount--

                    (A) paid or incurred in connection with--

                          *   *   *    *   *   *   *

                         (iii) any activity engaged in for
                    profit and for the production of income
                    before the day on which the active trade
                    or business begins, in anticipation of
                    such activity becoming an active trade
                    or business, and

                    (B)   which, if paid or incurred in connection
               with the   operation of an existing active trade or
               business   (in the same field as the trade or
               business   referred to in subparagraph (A)), would


     6
       The parties have also stipulated that petitioner is
entitled to personal exemptions for the years at issue. If
additional income tax is owing from petitioner, she concedes the
additions to tax under secs. 6651(a)(1) and (2) and 6654.
                                - 6 -

                 be allowable as a deduction for the taxable year
                 in which paid or incurred.

                 [Emphasis added.]

Respondent, citing the underlined portion of section 195,

contends that petitioner anticipated that her income-producing

activities would become an active trade or business.    Therefore,

respondent argues, expenses paid or incurred in the income-

producing activity must be capitalized.    Respondent’s argument

fails for several reasons.

     Ordinary and necessary expenses for all income-producing

activities, whether they are for business under section 162 or

nonbusiness under section 212, are intended to be on equal

footing.    Snyder v. United States, 674 F.2d 1359, 1364 (10th Cir.

1982); Looney v. Commissioner, T.C. Memo. 1985-326, affd. without

published opinion 810 F.2d 205 (9th Cir. 1987).    This means that

the distinction between an ordinary expense and a capital

expenditure should be applied in the same manner under both

sections.    Woodward v. Commissioner, 397 U.S. 572, 575 n.3

(1970).    This Court construes the term “startup expenditure” to

denote an expenditure that is capital rather than ordinary.    This

Court will not interpret section 195 to override the

deductibility of ordinary and necessary expenses petitioner

incurred in an ongoing section 212 activity any more than it

would do so for an ongoing section 162 activity.    See Crane v.

Commissioner, 331 U.S. 1, 13 (1947) (“one section of the act must
                               - 7 -

be construed so as not to defeat the intention of another or to

frustrate the Act as a whole”); Brons Hotels, Inc. v.

Commissioner, 34 B.T.A. 376, 381 (1936) (“The various sections of

the Act should be so construed that one section will explain and

support and not defeat or destroy another section”).     Once her

section 212 activity has begun, the deduction of ordinary and

necessary expenses paid or incurred in that activity is not

precluded by section 195 regardless of whether that activity is

subsequently transformed into a trade or business.     This

interpretation is consistent with section 195 and its legislative

history.

     In the 1980s several Federal Courts of Appeals were asked to

decide whether expenses paid or incurred during the preoperating

phase of a profit-seeking activity were deductible or had to be

capitalized.   Each of the cases involved tax years arising before

the effective date of section 195.     Six Courts of Appeals held

that, because section 212 and section 162 are in pari materia,

preopening expenses7 for either a section 212 activity or a


     7
       Before the enactment of sec. 195 in the Miscellaneous
Revenue Act of 1980, Pub. L. 96-605, sec. 102(a), 94 Stat. 3522,
a taxpayer was required to capitalize investigatory expenses and
startup costs of a new business under a body of law known as the
pre-opening expense doctrine, which was based upon sec. 162 and
the clear reflection of income principle. Richmond Television
Corp. v. United States, 345 F.2d 901, 904-907 (4th Cir. 1965),
vacated per curiam on other grounds 382 U.S. 68 (1965). Under
this doctrine, a taxpayer could recover preopening expenses only
by depreciating them over the life of the asset or deducting them
                                                   (continued...)
                               - 8 -

section 162 activity must be capitalized.    See Sorrell v.

Commissioner, 882 F.2d 484, 487-488 (11th Cir. 1989), revg. T.C.

Memo. 1987-351; Lewis v. Commissioner, 861 F.2d 1232, 1233 (10th

Cir. 1988), revg. T.C. Memo. 1986-155; Fishman v. Commissioner,

837 F.2d 309 (7th Cir. 1988), revg. T.C. Memo. 1986-127; Johnsen

v. Commissioner, 794 F.2d 1157, 1162 (6th Cir. 1986), revg. 83

T.C. 103 (1984); Aboussie v. United States, 779 F.2d 424, 428 n.6

(8th Cir. 1985).   The Court of Appeals for the Ninth Circuit

affirmed a holding of the Tax Court which found preopening

expenditures of a section 212 activity could be deducted.

Hoopengarner v. Commissioner, 80 T.C. 538 (1983), affd. without

published opinion 745 F.2d 66 (9th Cir. 1984).8




     7
      (...continued)
as a loss when the asset was sold.     See Commissioner v. Idaho
Power Co., 418 U.S. 1 (1974).
     8
       In Hardy v. Commissioner, 93 T.C. 684, 693 (1989), affd.
in part and remanded in part (10th Cir., Oct. 29, 1990), we
overruled our Opinion in Hoopengarner v. Commissioner, 80 T.C.
538 (1983), affd. without published opinion 745 F.2d 66 (9th Cir.
1984). The year in suit in Hardy was 1982, to which the 1984
amendment of sec. 195 did not apply.
                               - 9 -

     Observing that section 195 as originally enacted9 in the

Miscellaneous Revenue Act of 1980, Pub. L. 96-605, sec. 102(a),

94 Stat. 3522, was ambiguous and caused excessive litigation, in

1984 Congress amended the statute.     Deficit Reduction Act of

1984, Pub. L. 98-369, sec. 94(a), 98 Stat. 614; S. Prt. 98-169

(Vol. I), at 282-283 (1984).   The Senate print accompanying the

Deficit Reduction Act of 1984 stated that the intent of Congress

in amending the statute was to “decrease the controversy and

litigation arising under present law with respect to the proper

tax treatment of start-up expenditures” by requiring expenses

similar to those allowed as deductions in Hoopengarner to be

capitalized.   S. Prt. 98-169 (Vol. I), supra at 283.    The purpose

of the 1984 amendment to section 195 was to bring sections 212

and 162 into parity when determining whether an expenditure has

been incurred in a startup activity.




     9
       As originally enacted sec. 195(b) defined “startup
expenditures” to mean any amount:

     (1) paid or incurred in connection with--

          (A) investigating the creation or acquisition of
     an active trade or business, or

          (B) creating an active trade or business, and

     (2) which, if paid or incurred in connection with the
     expansion of an existing trade or business * * * would
     be allowable as a deduction for the taxable year in
     which paid or incurred.
                             - 10 -

     We have found that petitioner operated her horse boarding

and training activities for profit in 1998 and has continued to

engage in these same activities through the date of trial.

Respondent concedes petitioner engaged in these activities for

profit during the years at issue.   Additionally, respondent does

not argue the application of section 183 and does not dispute the

amounts of the expenses or that they were ordinary or necessary.

Therefore, the Court holds that petitioner’s expenses

attributable to her horse boarding and training activities during

the years at issue are deductible pursuant to section 212.



                                         Decisions will be entered

                                    under Rule 155.
