                         T.C. Memo. 1997-486



                       UNITED STATES TAX COURT



        JACK R. AND PATRICIA J. FINNEGAN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6944-95.                   Filed October 28, 1997.



     Jack R. Finnegan, pro se.

     Louis B. Jack, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined a $10,801 deficiency

in petitioners' 1991 Federal income tax.   The issue for decision

is whether petitioners are entitled to deduct various costs
                                 - 2 -


incurred in connection with their construction and attempted sale

of a house under section 162.1

                         FINDINGS OF FACT

     Oral stipulations were made at trial.   The oral stipulation

of facts and the referenced exhibits are incorporated herein by

this reference.   Petitioners, husband and wife, resided in Santa

Ana, California, at the time they filed their petition.

     During 1991, petitioner Jack R. Finnegan (Mr. Finnegan) was

a construction consultant.   Mr. Finnegan ran his construction

consulting business out of his home in Santa Ana.   As a

construction consultant, Mr. Finnegan was hired by third parties:

(1) To construct and estimate the cost of projects such as

houses, banks, restaurants, schools, and hospitals; (2) to help

put bids together; and (3) to act as an arbitrator, architect,

quantity surveyor, developer, project manager, or general

contractor.   As a construction consultant, Mr. Finnegan was paid

a fixed amount for each project.    He was compensated regardless

of whether the project was sold.

     During 1991, in addition to his job as a construction

consultant, Mr. Finnegan constructed a house located at 871

Avenida Acapulco in San Clemente, California (the Acapulco



     1
        All section references are to the Internal Revenue Code
in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
                                 - 3 -


house).2    Mr. Finnegan was not compensated for his work on, nor

hired by a third party to build, the Acapulco house.     Mr.

Finnegan had a construction trailer, which he used as an office,

parked at the Acapulco house.     Mr. Finnegan maintained a

telephone line, water, electric, and other utilities at the

Acapulco house.

     Mr. Finnegan performed substantial amounts of work to

construct the Acapulco house including, but not limited to:

Laying and staking the building; making the exterior door frames,

window frames, and arched brick work; manufacturing the round

top, stained glass, and leaded glass windows; manufacturing and

finishing the cathedral, coffered, inverted pyramidal, and beamed

ceilings; and designing and installing a complete irrigation and

drainage system.

     Petitioners tried, but were unable, to sell the Acapulco

house.     Mr. Finnegan was not a licensed real estate broker, and

petitioners never listed the Acapulco house with a real estate

broker or sales agent.     Instead, petitioners put a "for sale"

sign in front of the house and ran a classified advertisement,

starting in April 1991, in the Orange County Register.     As of the

time of trial, the Acapulco house had not been sold.



     2
        During the last 20 years, Mr. Finnegan constructed only
one other house for sale, which was sold in 1978 or 1979, where
he was not acting as a construction consultant.
                                - 4 -


     On August 16, 1992, petitioners timely filed their Federal

income tax return for 1991 (the original return).   On Schedule C

of the original return, Mr. Finnegan listed his principal

business or profession as "Construction Consultant".     In

addition to other income, petitioners reported $16,793.89 in

gross receipts from the construction consulting business which

consisted of payments from (1) Columbo Construction Co. for work

on two elementary schools in Ridgecrest, California, and (2) Hil-

Gan Development Corp. for repairing an apartment building in

Tustin, California, completing a security gates contract, and

managing the apartment building in Tustin, California.    The

original return showed a tax liability of $46,842.82.

Petitioners paid this amount.

     On January 3, 1994, petitioners filed an amended return for

1991 (the amended return) which showed a revised tax liability of

$27,371.12 and sought a refund of $19,471.70.   On Schedule C of

the amended return, which listed Mr. Finnegan's principal

business or profession as "Construction Consultant", petitioners

claimed an additional $59,186.95 of expenses (the additional

expenses).3   Petitioners incurred all of the additional expenses

     3
        These additional expenses are the result of petitioners'
claiming new items or increasing the amount for items claimed on
the original return. Respondent concedes that petitioners
substantiated the following amounts:

                                                    (continued...)
                                - 5 -


in connection with their construction and attempted sale of the

Acapulco house (the real estate activity).4

     In April 1994, the Internal Revenue Service (IRS) assigned

petitioners' refund claim to Office Auditor Monte Kruse (Mr.

Kruse).    On or about May 20, 1994, Mr. Kruse proposed a partial

disallowance of the refund claim.     On or about June 23, 1994, Mr.

Kruse sent petitioners a Letter 905 (Formal Notice of Partial

Claim Disallowance) which allowed $10,801 of the refund claim.

Petitioners protested the proposed partial disallowance, and on

June 30, 1994, the case was referred to the Appeals Office.

     On July 5, 1994, $10,801 of the tax was abated.      On or about

July 25, 1994, the examination division notified petitioners that

$10,801 would be refunded.




     3
        (...continued)
            Item                                 Amount

            Advertising                         $1,719.83
            Commissions and Fees                   125.00
            Repairs and Maintenance                 85.00
            Supplies                             4,405.99
            Utilities                              921.08
            Mortgage Interest                   49,860.47

            Total                               57,117.37

Petitioners concede any difference between the new or increased
amounts and the amounts respondent concedes.
     4
          We use the term "real estate activity" for convenience
only.
                                 - 6 -


     On August 17, 1994, the Appeals Office referred the case

back to the examination division.    The case was assigned to

Revenue Agent Kurt Bensworth (Mr. Bensworth).    Sometime after

September 28, 1994, Mr. Bensworth issued a report recommending

full disallowance of the refund claim.    On April 24, 1995, the

IRS mailed a notice of deficiency to petitioners asserting a

deficiency of $10,801--the amount of the refund claim which was

previously allowed and abated.

                             OPINION

     Petitioners contend that the real estate activity was part

of the construction consulting business or, alternatively, that

it was a separate trade or business.     Respondent argues that the

real estate activity was not part of petitioners' construction

consulting business;5 furthermore, respondent contends that the

real estate activity was not itself a trade or business.

Therefore, according to respondent, section 162 does not support

the deductibility of the additional expenses.    Respondent

alternatively argues that if the real estate activity was part of

petitioners' construction consulting business, or was itself a

trade or business, then the additional expenses must be

capitalized.



     5
        Respondent concedes that Mr. Finnegan was in the trade or
business of being a construction consultant.
                               - 7 -


A.   Whether the Real Estate Activity Was Part of the
     Construction Consulting Business

     Mr. Finnegan ran the construction consulting business out of

his home in Santa Ana.   As a construction consultant, Mr.

Finnegan worked for third parties; he was compensated regardless

of whether the projects he constructed were sold.   There is no

evidence that he was responsible for selling the projects he

constructed.

     Mr. Finnegan had a separate office and telephone line for

the real estate activity at the Acapulco house in San Clemente.

Mr. Finnegan was not hired by a third party to build the Acapulco

house; his receipt of any money from his work on the Acapulco

house was conditioned upon its sale; and petitioners were

responsible for selling the Acapulco house.

     After reviewing all the facts and circumstances, we find

that the real estate activity was not part of petitioners'

construction consulting business.   Petitioners, therefore, were

not entitled to deduct the additional expenses as costs of the

construction consulting business.

B.   Whether the Real Estate Activity Was a Separate Trade or
     Business

     Deductions are a matter of legislative grace, and taxpayers

bear the burden of proving that they are entitled to any

deductions claimed.   Rule 142(a); INDOPCO, Inc. v. Commissioner,
                                - 8 -


503 U.S. 79, 84 (1992).    Taxpayers are allowed a deduction for

ordinary and necessary expenses paid or incurred in carrying on a

trade or business.   Sec. 162(a).   The Supreme Court has stated

that "to be engaged in a trade or business, the taxpayer must be

involved in the activity with continuity and regularity and that

the taxpayer's primary purpose for engaging in the activity must

be for income or profit.    A sporadic activity, a hobby, or an

amusement diversion does not qualify."    Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987).    Whether a taxpayer is in a

trade or business requires an examination of the facts and

circumstances of each case.    Higgins v. Commissioner, 312 U.S.

212, 217 (1941); see also Commissioner v. Groetzinger, supra at

36.   A taxpayer may engage in more than one trade or business at

the same time.   Snyder v. Commissioner, 295 U.S. 134, 138-139

(1935); Gestrich v. Commissioner, 74 T.C. 525, 529 (1980), affd.

without published opinion 681 F.2d 805 (3d Cir. 1982).

      A taxpayer who engaged in only one venture can be found to

be in a trade or business.    See Morley v. Commissioner, 87 T.C.

1206, 1211 (1986); S & H, Inc. v. Commissioner, 78 T.C. 234, 244

(1982).   These two cases, however, are distinguishable from the

case at bar.

      In S & H, Inc. v. Commissioner, supra, the taxpayer's

primary business was acquiring improved real property and either
                                 - 9 -


leasing or operating it.     In 1968, the taxpayer acquired 300

acres of unimproved land (the Whiteside Farm) which he considered

to be a good investment.     In 1973, Griffin Grocery Co. (Griffin)

approached the taxpayer about purchasing 10 acres of the

Whiteside Farm.     This transaction failed, but the taxpayer and

Griffin agreed that the taxpayer would construct a warehouse on

the Whiteside Farm, and Griffin would sublease the warehouse from

the taxpayer for 20 years.     Griffin had an option to purchase the

land and warehouse after 15 years for a fee or after 20 years

without payment merely by notifying the taxpayer of its election

to exercise the option.     The taxpayer stipulated that this

sublease agreement was an installment sale of the warehouse and

land to Griffin.

     The Court, in holding that the taxpayer's activity

constituted a trade or business, focused on the preexisting

arrangement to sell/transfer the Whiteside Farm to a specific

party who was committed to take it.      S & H, Inc. v. Commissioner,

supra at 244-245.    The Court characterized this transaction as

not being a "speculative venture".       Id. at 245.

     Mr. Finnegan's real estate activity, however, was a

speculative venture, and there was no preexisting arrangement

(nor any arrangement) for the transfer of the Acapulco house to
                                - 10 -


any specific party, let alone someone who was committed to pay

for it.

     In Morley v. Commissioner, supra, the taxpayer was in the

trade or business of selling real estate for commission as a

broker.     In September 1973, the taxpayer entered a contract

giving the taxpayer the right to purchase 180 acres of property

(the Elm Farm).     The taxpayer did not have a particular

repurchaser in mind at the time he entered the contract but

intended promptly to attempt to resell the Elm Farm if he

purchased it.     The taxpayer purchased the Elm Farm in December

1973.     From September 1973 to February 1974, the taxpayer was

negotiating the sale of the Elm Farm to a third party (Mr.

Pflug).     In February 1974, the real estate market collapsed, and

Mr. Pflug and the taxpayer terminated negotiations.     Because of

the real estate market collapse, the taxpayer was unable to sell

the Elm Farm to other purchasers although he attempted to do so.

     The Court stated that a taxpayer engaged in a single venture

can be found to be in a trade or business in "situations where,

at the time the property was acquired by the taxpayer, he

intended promptly to resell the property and the objective facts

show that he proceeded to attempt to implement that intent".

Morley v. Commissioner, supra at 1211.     In finding that the

taxpayer was engaged in a trade or business regarding his
                               - 11 -


activity involving the Elm Farm, the Court relied primarily upon

the negotiations between the taxpayer and Mr. Pflug and

secondarily on the fact that the taxpayer had no financial

resources (because the taxpayer's net worth was tied up in

nonliquid assets) which would allow him to cover the carrying

charges on the Elm Farm.    Id. at 1212.

     Unlike the taxpayer in Morley, Mr. Finnegan was not a real

estate broker, and he never listed the Acapulco house with a

broker or agent.    There were no negotiations with prospective

purchasers for the sale of the Acapulco house near or after its

completion, and Mr. Finnegan had significant financial

resources.6    Petitioners also still owned the Acapulco house 5

years after construction was completed.    Mr. Finnegan did not

meet his burden of proving that the real estate activity was a

trade or business, and the objective facts do not support

petitioners.

     Furthermore, when evaluating whether a taxpayer's activities

with respect to real estate amount to a trade or business, we

consider "the nature and purpose of the acquisition of the

property and the duration of the ownership; the continuity of

     6
        We note that petitioners listed their taxable income as
being $183,056.50 on the original return and $113,539.71 on the
amended return. These totals were derived from their income from
the construction consulting business, rental income, taxable
interest income, tax-exempt interest income, dividend income, a
director's fee, and income from a capital gain distribution.
                              - 12 -


sales or sales-related activity over a period of time; the volume

and frequency of sales; the extent to which the taxpayer or his

agents have engaged in sales activities by developing or

improving the property, soliciting customers, and advertising;

and the substantiality of sales when compared to other sources of

[the] taxpayer's income."   Polakis v. Commissioner, 91 T.C. 660,

670 (1988).   No one of these factors, however, is determinative.

Id.

      The factors set forth in Polakis weigh against Mr. Finnegan.

As to the nature and purpose of the construction of the Acapulco

house, a lack of business intent can be inferred from

petitioners' ownership of the Acapulco house for more than 5

years after Mr. Finnegan completed construction.   Mr. Finnegan's

sales were not continuous, frequent, or voluminous (he sold only

one home during the last 20 years which he constructed).    Mr.

Finnegan never hired a real estate agent or broker, and his

efforts to sell the Acapulco house were limited to putting a "for

sale" sign in front of the house and running a classified

advertisement in a local newspaper.    Petitioners have not offered

any credible explanation why the Acapulco house remained unsold

at the time of trial (5 years after Mr. Finnegan completed its
                               - 13 -


construction).7   Finally, petitioners had no income from the real

estate activity and substantial income from other sources.

     After reviewing all the facts and circumstances, we hold

that the real estate activity was not a trade or business.     Even

though Mr. Finnegan devoted time and effort to the real estate

activity, it was not regular and continuous.   By so holding, we

need not decide whether the real estate activity was engaged in

for profit.    Petitioners, therefore, were not entitled to deduct

any of the additional expenses under section 162.      We note that

in so holding we need not decide whether these amounts need to be

capitalized.

     In reaching all of our holdings herein, we have considered

all arguments by the parties and to the extent not mentioned

above, we find them to be irrelevant or without merit.

     To reflect the foregoing,

                                          Decision will be entered

                                     for respondent.




     7
        Mr. Finnegan claims that the real estate market hit hard
times after he completed construction of the Acapulco house.
There is no evidence, however, that the market remained poor for
the entire 5 years after he completed construction.
