                         T.C. Memo. 2010-126



                       UNITED STATES TAX COURT



                      ANJUM SHIEKH, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 29798-07.                Filed June 10, 2010.



     Anjum Shiekh, pro se.

     Christine K. Lane, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:    Respondent determined deficiencies in

petitioner’s Federal income taxes of $2,543 for 2003 and $2,571

for 2004.    After concessions, the following issues remain for

decision:1    (1) Whether expenses related to petitioner’s personal


     1
      Respondent has conceded the issue of whether petitioner
                                                   (continued...)
                              - 2 -

residence claimed on Schedules E, Supplemental Income and Loss,

attached to his tax returns for the years in issue are deductible

as rental expenses; (2) whether petitioner has substantiated $509

of the $26,393 in real property taxes claimed as a deduction on

his 2003 tax return; (3) whether the losses related to

petitioner’s rental property in Culver City, California, and

claimed on his 2004 tax return are subject to passive activity

limitations pursuant to section 469;2 (4) whether the expenses

relating to petitioner’s rental property in Ventura, California,

and claimed on Schedule E attached to his 2004 tax return are

deductible as rental expenses; and (5) whether the $5,481

petitioner claimed as unreimbursed employee business expenses on

his 2004 tax return is deductible.3




     1
      (...continued)
failed to include in gross income $6,136 of rental income he
received during his 2004 tax year.
     2
      Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code, as amended, for the
years in issue. Amounts are rounded to the nearest dollar.
     3
      Respondent also contends that the miscellaneous itemized
deduction petitioner claimed on his 2003 tax return should be
reduced by $334 and that the personal exemption he claimed on his
2004 tax return should be reduced by $434. Those matters are
computational and will be resolved in accordance with our
holdings pursuant to a Rule 155 calculation.
                                - 3 -

                           FINDINGS OF FACT

     Some of the facts and certain exhibits have been stipulated.

The stipulations of fact are incorporated in this opinion by

reference and are found accordingly.

     At the time the petition was filed, petitioner resided in

Miami, Florida.

     During the years in issue petitioner managed rental

properties he owned and, for part of 2003, was employed as an

airline pilot for United Airlines.      Petitioner was furloughed by

United Airlines beginning in November 2003 and did not work for

the airline during 2004.

     During the years in issue petitioner owned rental properties

in Miami Beach, Florida (Miami Beach property), Edmond, Oklahoma

(Edmond property), Ventura, California (Ventura property), and

Culver City, California (Culver City property).

     The Miami Beach property is a 13-unit apartment building.

Petitioner lives in one of the units, a one-bedroom apartment,

and maintains part of the space as his office for his rental

activities (personal residence).    Petitioner claimed deductions

for the expenses attributable to all 13 apartments on Schedule E

of his Federal income tax returns for tax years 2003 and 2004.

The claimed deductions included real property taxes, mortgage
                               - 4 -

interest, and depreciation.4   Petitioner actively and materially

manages the Miami Beach property.

     The Edmond property is a condominium.    Petitioner reported

net income, after expenses, from the Edmond property of $1,658

and $2,048 for his 2003 and 2004 tax years, respectively.

     The Ventura property is a condominium.    Petitioner claimed

losses from the Ventura property of $1,954 and $5,856 for his

2003 and 2004 tax years, respectively.5    Petitioner sold the

Ventura property during 2004 and claimed a long-term capital gain

on the sale on his 2004 tax return.    Respondent allowed $1,954 of

the loss for the 2003 tax year.     Respondent disallowed $5,856 of

the loss for the 2004 tax year as a rental real estate loss but

allowed it as an offset against the capital gain recognized from

the sale of the Ventura property.

     The Culver City property is a condominium.    Petitioner

claimed losses from the Culver City property of $10,006 and


     4
      Petitioner claimed deductions on Schedule E attached to his
return for tax year 2003 for the Miami Beach property of $4,436
for mortgage interest, $2,500 for real property taxes, and $3,623
for depreciation. Petitioner claimed deductions on Schedule E
attached to his return for tax year 2004 for the Miami Beach
property of $4,228 for mortgage interest, $2,122 for real
property taxes, and $3,502 for depreciation.
     5
      Respondent determined that the 2003 and 2004 losses from
the Ventura property were losses from a passive activity. For
the 2003 tax year respondent allowed the 2003 loss for the full
amount. For the 2004 tax year respondent offset the 2004 loss
against the gain recognized from the sale of the Ventura
property. See sec. 1.469-2T(c)(2), Temporary Income Tax Regs.,
53 Fed. Reg. 5711 (Feb. 25, 1988).
                               - 5 -

$9,511 on his 2003 and 2004 tax returns, respectively.

Respondent allowed the $10,006 of the loss for the 2003 tax year

and disallowed $7,463 of the loss claimed during the 2004 tax

year.

     Petitioner’s leases with tenants for the Culver City and

Ventura properties included a clause requiring the tenants to be

responsible for routine maintenance.   Petitioner collected the

rent from the California properties and visited the California

properties periodically during the years in issue.

     Petitioner concedes that he did not file an election

pursuant to section 469(c)(7)(A) to treat all of his rental

properties as one rental activity for purposes of the passive

activity limitations.

     Petitioner traveled to California and Colombia, South

America, to investigate the potential acquisition of new rental

properties.   On his 2004 tax return petitioner claimed travel

expense for those trips as unreimbursed employee expenses of

$5,481, all of which respondent disallowed.

     By letter dated December 6, 2007, respondent sent petitioner

a notice of deficiency.   Petitioner timely filed a petition in

this Court for redetermination of the deficiencies.
                               - 6 -

                              OPINION

     Generally, the Commissioner’s determination of a deficiency

is presumed correct, and the taxpayer has the burden of proving

it incorrect.   Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).6

     We first address the issue of whether the expenses

attributable to petitioner’s personal residence, a one-bedroom

apartment, are deductible as rental expenses.   Petitioner

contends that the mortgage interest, real estate taxes, and

depreciation expense attributable to his personal residence are

deductible because he manages his rental properties from his

personal residence.   Respondent contends that the depreciation

expenses on petitioner’s personal residence are personal and,

therefore, are not deductible.7

     Deductions are a matter of legislative grace, and taxpayers

bear the burden of proving that they have met all requirements

necessary to be entitled to the claimed deductions.   Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).




     6
      Petitioner does not contend that sec. 7491(a) should apply
to shift the burden of proof to respondent, nor did he establish
that it should apply to the instant case.
     7
      Respondent concedes that petitioner may deduct mortgage
interest and real property taxes associated with his personal
residence on Schedule A, Itemized Deductions, for each of
petitioner’s 2003 and 2004 tax years.
                               - 7 -

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

business expenses paid or incurred in carrying out a trade or

business.   Section 262(a), however, generally prohibits

deductions for personal, living, or family expenses.

     Generally, no deduction is allowed with respect to the

personal residence of a taxpayer.   Sec. 280A(a).   Section

280A(c)(1)(A), however, provides that section 280A(a) shall not

apply to the portion of a personal residence of a taxpayer

exclusively used on a regular basis as the principal place of

business for any trade or business of the taxpayer.    The

legislative history of section 280A dealing with exclusive use

states as follows:

          Exclusive use of a portion of a taxpayer's dwelling
     unit means that the taxpayer must use a specific part of a
     dwelling unit solely for the purpose of carrying on his
     trade or business. The use of a portion of a dwelling unit
     for both personal purposes and for the carrying on of a
     trade or business does not meet the exclusive use test.
     Thus, for example, a taxpayer who uses a den in his dwelling
     unit to write legal briefs, prepare tax returns, or engage
     in similar activities as well for personal purposes, will be
     denied a deduction for the expenses paid or incurred in
     connection with the use of the residence which are allocable
     to these activities. * * *

S. Rept. 94-938, at 148 (1976), 1976-3 C.B. (Vol. 3) 49, 186; H.

Rept. 94-658, at 161 (1975), 1976-3 C.B. (Vol. 2) 695, 853.

     The record shows that petitioner’s personal residence was

used on a regular basis as the principal place of business for

managing his rental properties.   Petitioner used his personal

residence as his office and stored tools there, and tenants paid
                                - 8 -

their rent there.   However, petitioner presented no evidence that

any specific area of his personal residence, a one-bedroom

apartment, was used exclusively for business purposes.

Consequently, petitioner fails the exclusive use test regarding

any specific portion of his personal residence.    Therefore, we

hold that section 280A(a) disallows the deductions petitioner

claimed for his personal residence, except as to those deductions

respondent conceded.   Accordingly, we uphold respondent’s

disallowance of deductions for depreciation on petitioner’s

personal residence claimed on Schedules E for 2003 and 2004 tax

years.

     As to the issue of whether petitioner has substantiated $509

of the $26,393 in real property taxes claimed on his tax return

for the 2003 tax year, petitioner bears the burden of proving

that respondent’s determination is incorrect.     See Rule 142(a);

Welch v. Helvering, supra.   Petitioner presented no evidence or

argument regarding the real property taxes disallowed.

Petitioner, therefore, has failed to meet his burden of proof.

Accordingly, we sustain respondent’s deficiency determination

regarding petitioner’s real property taxes claimed on his tax

return for his 2003 tax year.

     We next address whether the losses related to the Culver

City property for tax year 2004 are subject to passive activity

limitations pursuant to section 469.    Petitioner contends that
                                  - 9 -

all of his real properties should be considered together and that

he actively and materially participated in the management of the

Culver City property.   Respondent contends that petitioner’s

rental properties should be considered separate activities and

that petitioner failed to actively and materially participate in

managing the Culver City property.

     Taxpayers are allowed deductions for certain business and

investment expenses under sections 162 and 212; however, section

469 generally disallows any passive activity loss for the tax

year.   A passive activity loss is defined as the excess of the

aggregate losses from all passive activities for that year over

the aggregate income from all passive activities for such year.

Sec. 469(d)(1).   A passive activity is any trade or business in

which the taxpayer does not materially participate.    Sec.

469(c)(1).   Rental activity is generally treated as a per se

passive activity regardless of whether the taxpayer materially

participates.   Sec. 469(c)(2).    Pursuant to section 469(c)(7)(B),

the rental activities of a taxpayer who is a real estate

professional are not per se passive activities under section

469(c)(2) but are treated as a trade or business subject to the

material participation requirements of section 469(c)(1).     Sec.

1.469-9(e)(1), Income Tax Regs.
                              - 10 -

     Under section 469(c)(7)(B), a taxpayer qualifies as a real

estate professional and is not engaged in a passive activity

under section 469(c)(2) if:

          (i) more than one-half of the personal services
     performed in trades or businesses by the taxpayer during
     such taxable year are performed in real property trades or
     businesses in which the taxpayer materially participates,
     and

          (ii) such taxpayer performs more than 750 hours of
     services during the taxable year in real property trades or
     businesses in which the taxpayer materially participates.

If the requirements of section 469(c)(7)(B) are met, a taxpayer’s

rental activity is treated as a passive activity under section

469(c)(1) unless the taxpayer materially participates in the

activity.

     Respondent concedes that petitioner meets the requirements

of section 469(c)(7)(B) and is, therefore, a real estate

professional.   Accordingly, we consider whether petitioner’s work

with his rental properties meets the material participation

standard set forth in section 469(c)(1).   For purposes of

determining whether a taxpayer materially participates in a trade

or business, the participation requirements must be met with

respect to each interest in rental real estate unless the

taxpayer makes an election to treat all interests in rental real

estate as a single real estate activity.   Sec. 469(c)(7)(A).

     Petitioner contends that his consolidation of his rental

activities on Schedule E is sufficient to treat his interests in
                              - 11 -

rental properties as a single real estate activity for purposes

of the material participation test.    Respondent contends that

petitioner’s rental properties should be evaluated separately

because petitioner failed to file an election pursuant to section

469(c)(7)(A) to treat all of his rental properties as a single

real estate activity.

     To make an election, a taxpayer must clearly notify the

Commissioner of the taxpayer’s intent to do so.    See Knight-

Ridder Newspapers, Inc. v. United States, 743 F.2d 781, 795 (11th

Cir. 1984).   “[T]he taxpayer must exhibit in some manner * * *

his unequivocal agreement to accept both the benefits and burdens

of the tax treatment afforded” by the law.    Young v.

Commissioner, 83 T.C. 831, 839 (1984), affd. 783 F.2d 1201 (5th

Cir. 1986).   A taxpayer makes the election to treat all interests

in rental real estate as a single rental real estate activity by

filing a statement with the taxpayer’s original income tax return

declaring that the election is under section 469(c)(7)(A).       Trask

v. Commissioner, T.C. Memo. 2010-78; sec. 1.469-9(g)(3), Income

Tax Regs.   A taxpayer has not made an election if it is not clear

from the return that an election has been made.    See Young v.

Commissioner, 783 F.2d at 1206.

     We have held that aggregating losses from Schedule E on line

17 of Form 1040, U.S. Individual Income Tax Return, is

insufficient notice to the Commissioner that the taxpayer
                              - 12 -

intended to elect to treat all his rental properties as a single

activity under section 469(c)(7).   Kosonen v. Commissioner, T.C.

Memo. 2000-107.   Similarly, a taxpayer’s intent to elect, without

exhibiting an unequivocal agreement to accept both the benefits

and the burdens of such an election, is irrelevant to making a

determination of whether he or she has made an election.      See

Young v. Commissioner, 783 F.2d at 1206;    Kosonen v.

Commissioner, supra.

     Petitioner failed to file an election to treat all of his

rental properties as a single real estate activity.      See sec.

1.469-9(g)(3), Income Tax Regs.   Petitioner’s aggregate treatment

of his rental properties on his return is insufficient to provide

notice to respondent that petitioner elected to treat all of his

rental properties as a single real estate activity.      See Kosonen

v. Commissioner, supra.   Similarly, petitioner’s intention to

file an election, without actually exhibiting his unequivocal

agreement to accept the benefits and burdens of such an election,

also failed to provide sufficient notice.   Nowhere on

petitioner’s return did he exhibit his unequivocal agreement to

accept the benefits and burdens of an election under section

469(c)(7)(A).   Accordingly, we evaluate each of petitioner’s

properties separately in order to determine whether petitioner

materially participated in the particular rental activity.
                                 - 13 -

      Material participation is defined as involvement in the

operations of the activity that is regular, continuous, and

substantial.   Sec. 469(h)(1).    An individual taxpayer materially

participates in an activity pursuant to section 1.469-5T(a),

Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988),

if:   (1) He or she participates more than 500 hours during the

year; (2) his or her participation is substantially all of the

participation of individuals in that activity for the year; (3)

he or she participates more than 100 hours and that participation

equals the participation of all other individuals during the

year; (4) the activity is a significant participation activity

and his or her aggregate participation in all significant

participation activities exceeds 500 hours; (5) he or she

materially participates for 5 out of 10 years immediately

preceding the year in issue; (6) the activity is a personal

service activity and he or she materially participated for any 3

years preceding the year in issue; or (7) on all the facts and

circumstances, he or she participated on a regular, continuous,

and substantial basis during the year.     Kosonen v. Commissioner,

supra.

      As to the Culver City property, petitioner fails to meet the

tests for material participation.     Petitioner presented no

evidence on the number of hours that he spent managing the Culver

City property; he only stated that he made several trips and was
                               - 14 -

actively involved.   Consequently, petitioner fails the 500-hour

test (1), as well as tests (3) and (4), which require petitioner

to show that he worked for a minimum of 100 hours on the Culver

City property, as required by section 1.469-5T(a), Income Tax

Regs., supra.    Similarly, petitioner fails tests (5) and (6),

which measure participation over a period of years preceding

those in issue, because petitioner failed to present evidence for

any years except 2003 and 2004.   Petitioner also fails tests (2)

and (7).    The leases on the Culver City property stated that the

tenants would be responsible for the maintenance of that

property.   While petitioner testified that he visited the Culver

City property, the record shows only that he was present in the

Los Angeles area for 1 day during tax year 2004:    February 27.8

Accordingly, petitioner has not shown that his participation was

substantially all of the relevant participation with respect to

the Culver City property for tax year 2004 or that it was regular

or continuous.    Consequently, we conclude that petitioner has

failed to show that he materially participated with respect to

the Culver City property.    We, therefore, hold that petitioner’s

losses with respect to the Culver City property for tax year 2004

are disallowed pursuant to section 469.




     8
      Culver City, California, is in Los Angeles County,
California.
                               - 15 -

     As to petitioner’s expenses with respect to the Ventura

property for tax year 2004, respondent contends that the losses

are passive and should be allocated against petitioner’s capital

gain from the sale of the Ventura property.

     As stated above, a taxpayer may not deduct passive activity

losses in excess of passive activity income; however, excess

losses may be carried forward to subsequent years to offset

subsequent passive activity income.     Sec. 469(a), (b), (d).    If,

however, a taxpayer sells his entire interest in a passive

activity, an excess loss relating to the activity for the year

the sale occurs (including suspended losses relating to the

activity carried forward into the year of the sale) over the

total income for the current year from all passive activities is

treated as a loss from a nonpassive activity and is not subject

to the above limitation of section 469(a).     Sec. 469(g); Lee v.

Commissioner, T.C. Memo. 2006-70.

     As we held above, petitioner is a real estate professional

who did not file an election to treat his rental properties as a

single real estate activity.   Petitioner’s evidence that he was

actively involved in the Ventura property is the same as that

provided for the Culver City property.     We find petitioner’s

evidence unpersuasive and conclude that the Ventura property is a

passive activity.   However, petitioner completely disposed of the

Ventura property in a taxable transaction during his 2004 tax
                                 - 16 -

year.     Gain from the disposition of property used in a passive

activity is treated as passive income.     Sec. 1.469-2T(c)(2),

Temporary Income Tax Regs., 53 Fed. Reg. 5711 (Feb. 25, 1988).

Consequently, the losses generated by the Ventura property should

be deducted against the capital gain from the sale of the Ventura

property.     Accordingly, we sustain respondent’s determination

regarding the losses from the Ventura property for petitioner’s

2004 tax year.9

     Finally, we address the $5,481 petitioner claimed on his

return for his 2004 tax year in unreimbursed employee expenses

which respondent disallowed.10    Petitioner contends that the

amounts he claimed are fully deductible as they relate to

business expenses incurred while searching for new rental

properties.     Respondent contends that the disallowed amounts are

nondeductible because they were not properly substantiated.        In

the alternative, respondent contends that the disallowed expenses

relate to new properties and, therefore, must be capitalized.




     9
      In the notice of deficiency, respondent applied the losses
generated by the Ventura property to the sale proceeds of the
Ventura property.
     10
       Petitioner claimed the excess unreimbursed employee and
other miscellaneous expense deductions on Schedule A attached to
his return. The deductible amount equals the sum of allowable
unreimbursed employee expenses and other miscellaneous expenses,
less 2 percent of the taxpayer’s adjusted gross income. Sec.
67(a).
                               - 17 -

       Generally, a taxpayer is permitted to deduct the ordinary

and necessary expenses that he or she pays or incurs during the

tax year in carrying on a trade or business.    Sec. 162(a).   A

taxpayer, however, is required to maintain records sufficient to

establish the amount of the deduction.    Sec. 6001; sec. 1.6001-

1(a), Income Tax Regs.

       When a taxpayer establishes that he or she paid or incurred

a deductible expense but does not establish the amount of the

deduction to which he or she may be entitled, we may in certain

circumstances estimate the amount allowable.     Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985).     There must be

sufficient evidence in the record, however, to permit us to

conclude that a deductible expense was paid or incurred in at

least the amount allowed.    Williams v. United States, 245 F.2d

559, 560 (5th Cir. 1957); Vanicek v. Commissioner, supra at 742-

743.

       Certain categories of expenses must also satisfy the strict

substantiation requirements of section 274(d) in order for a

deduction to be allowed.    The Cohan doctrine may not be used to

estimate expenses covered by section 274(d).    See Sanford v.

Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d

201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs.,
                               - 18 -

50 Fed. Reg. 46014 (Nov. 6, 1985).      Section 274(d) expenses

include travel expenses.    Sec. 274(d)(1).

     To substantiate a deduction pursuant to section 274(d), a

taxpayer must maintain adequate records or present corroborative

evidence to show the following:    (1) The amount of the expense;

(2) the time and place of the expense; and (3) the business

purpose of the expense.    Sec. 274(d); sec. 1.274-5T(b)(2),

Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

     Petitioner reported travel expenses that he incurred while

investigating the possibility of acquiring new rental properties.

To be deductible, the travel expenses must be ordinary and

necessary expenses incurred in carrying on a trade or business.

Sec. 162(a).    The determination of trade or business is a factual

determination made on a case-by-case basis.      O’Donnell v.

Commissioner, 62 T.C. 781, 786 (1974), affd. without published

opinion 519 F.2d 1406 (7th Cir. 1975).

     Additionally, for foreign travel, section 274(c)(1)

generally disallows a deduction for the portion of the foreign

travel expenses that is not allocable to the income-producing

activity.   However, section 274(c)(2) provides an exception to

section 274(c)(1) if the trip qualifies under one of two

exceptions:    (A) The trip does not exceed 1 week, or (B) the

portion of the trip not attributable to the taxpayer’s section

212 activities constitutes less than 25 percent of the total time
                               - 19 -

of the stay.    Hintze v. Commissioner, T.C. Memo. 2001-70.

Foreign travel expenses may also be deductible if either of the

following applies:   (1) The taxpayer incurring the expenses did

not have “substantial control over the arranging of the business

trip”; or (2) obtaining a personal vacation or holiday was not a

major consideration in the decision to make the trip.   Sec.

1.274-4(f)(5), Income Tax Regs.   Section 274(c) applies only to

expenses incurred by the traveler, not the traveler’s employer or

client.   Sec. 1.274-4(a), Income Tax Regs.

     Petitioner owns rental properties in Miami Beach, Florida;

Edmond, Oklahoma; Ventura, California; and Culver City,

California.    Petitioner claimed a deduction for travel expenses

that relate to the investigation of new rental properties in

California and Colombia, South America.   Petitioner’s claimed

expenses included car rental fees, airfare, hotel charges, and a

“per diem” for each travel day.

     The record is unclear regarding the length of petitioner’s

stay in Colombia, South America.11   However, neither at trial nor


     11
      Petitioner submitted an electronic ticket for airfare for
his trips, including his trip to Colombia, South America. The
electronic ticket lists the dates Aug. 16 and Aug. 24. However,
it is unclear from the electronic ticket where petitioner
traveled and whether any additional trips were made during that
time. Petitioner’s hotel receipt lists the dates of the trip to
Colombia, South America, as Aug. 19 to Aug. 24. Petitioner’s
other receipts that relate to Colombia, South America, do not
evidence any purchases before Aug. 22 or after Aug. 24.
Petitioner did not specifically testify regarding how long he was
                                                    (continued...)
                              - 20 -

in the notice of deficiency did respondent raise any issues as to

whether petitioner was in South America for more than a week.

See sec. 274(c).   We, therefore, decline to address whether the

requirements of section 274(c) apply to petitioner’s travel to

South America.

     In addition to petitioner’s receipts, he also testified at

trial, making a blanket statement that all of his expenses were

business expenses.   However, petitioner failed to offer any

specific testimony regarding his trip to Colombia, South America.

We, therefore, do not accept his uncorroborated testimony

regarding the nature of that trip.     Additionally, one of

petitioner’s receipts was for the purchase of clothing.       On the

basis of the record, we hold that petitioner has failed to prove

that his trip to Colombia, South America, was for business

purposes.   See Rule 142(a); see also Myers v. Commissioner, 38

T.C. 658, 666 (1962).   Accordingly, we sustain respondent’s

disallowance of expenses that relate to petitioner’s

investigation of rental properties in Colombia, South America.12



     11
      (...continued)
in Colombia, South America.
     12
      If we were to assume that petitioner’s expenses that
relate to the investigation of rental properties in South America
were business expenses, petitioner would have to capitalize those
expenses because they were directly related to the acquisition of
a capital asset; namely, a new rental property. See sec. 263;
Lychuk v. Commissioner, 116 T.C. 374 (2001); see also Radio
Station WBIR, Inc. v. Commissioner, 31 T.C. 803, 814 (1959).
                               - 21 -

     Petitioner also claimed expenses for traveling to the Los

Angeles and San Francisco areas to investigate new rental real

estate investments.   Respondent contends that petitioner must

capitalize those expenses pursuant to section 263.   While current

expenses are deductible pursuant to section 162, section 263

denies a deduction for capital expenditures.   An expenditure must

be capitalized when it:    (1) Creates or enhances a separate and

distinct asset, (2) produces a significant future benefit, or (3)

is incurred “in connection with” the acquisition of a capital

asset.   Lychuk v. Commissioner, 116 T.C. 374, 385-386 (2001).      An

expense is incurred “in connection with” the acquisition of a

capital asset when it is directly related to the acquisition.

Id. at 386.   Capital expenditures are not limited to the actual

price the buyer pays the seller but also include the ancillary

costs related to the asset acquisition.    Id. at 389.   Sections

162 and 261 provide that capitalization takes precedence over the

allowance of deductions.   See Commissioner v. Tellier, 383 U.S.

687, 689-690 (1966) (“The principal function of the term

‘ordinary’ in § 162(a) is to clarify the distinction, often

difficult, between those expenses that are currently deductible

and those that are in the nature of capital expenditures”).

     Petitioner testified, and we conclude, that his travel

expenses were for the investigation of new rental properties.

Such expenses are directly related to the acquisition of a
                              - 22 -

capital asset; namely, a new rental property.    Accordingly, the

investigatory expenses must be capitalized.    Petitioner, however,

never purchased any new rental properties.    The fact that a

taxpayer does not make an investment does not change the nature

of the expenditure; the expense nevertheless must be capitalized.

Radio Station WBIR, Inc. v. Commissioner, 31 T.C. 803, 814

(1959).   With an abandoned investment, a taxpayer may suffer a

loss, but the loss may not be recognized until it is definitely

realized.   Sec. 165; Ellis Banking Corp. v. Commissioner, 688

F.2d 1376, 1382 (11th Cir. 1982), affg. in part and remanding in

part T.C. Memo. 1981-123.   Petitioner failed to present evidence

that he abandoned his search for rental properties during his

2004 tax year.   Accordingly, we hold that petitioner is not

entitled to a current deduction for his 2004 tax year for travel

expenses relating to the investigation of new rental properties

under either section 162 or section 165.

     The Court has considered all other arguments made by the

parties and, to the extent we have not addressed them herein, we

consider them moot, irrelevant, or without merit.

     To reflect the foregoing and respondent’s concessions,



                                           Decision will be entered

                                    under Rule 155.
