                   T.C. Summary Opinion 2010-79



                      UNITED STATES TAX COURT



                MUHAMMAD AHMED ALVI, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15655-08S.              Filed June 21, 2010.



     Muhammad Ahmed Alvi, pro se.

     Thomas D. Yang, for respondent.



     DEAN, Special Trial Judge:     This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

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

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

and this opinion shall not be treated as precedent for any other

case.   Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the year in issue,
                              - 2 -

and all Rule references are to the Tax Court Rules of Practice

and Procedure.

     The issues for decision are whether for 2005:   (1)

Petitioner’s activities constituted separate activities; (2)

petitioner’s activities were operating as going concerns, and if

so, whether expenses attributable to the activities are

deductible on Schedule C, Profit or Loss From Business; (3)

petitioner is liable for an addition to tax under section

6651(a)(1); and (4) petitioner is liable for an addition to tax

under section 6654(a).

                           Background

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

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.   When petitioner filed his

petition, he resided in Illinois.

     On a 2005 Federal income tax return provided to the Court on

the date of trial, petitioner reported $4,387 of gross income and

$55,067 of total expenses on Schedule C.   For 2005 he also

reported gross receipts of $17,610 for his work as a physician on

Schedule C-EZ, Net Profit From Business.
                               - 3 -

I.   Petitioner’s “Business” Activities

      During 2005 petitioner managed several activities under a

single “business” name, SkillsSoft.1   He hired several employees

to develop the activities, and the employees performed work for

all of the activities using the same tools, software programs,

and resources.

      Petitioner’s activities encompassed a variety of interests.

His activities consisted of:   (1) Edokan, an online retail sales

Web site; (2) efattofit.com, a weight loss Web site, designed to

assist consumers with determining their body mass index and

calculating their body’s optimal caloric intake; (3) Desi, a

Pakistani language video and music Web site; (4) an individual

weight loss software program; (5) a software program for Urdu to

English and English to Urdu translation and an Internet-based

dictionary; and (6) software for a physician’s desk reference

guide.

      Edokan was the only activity to generate income in 2005.

      Petitioner did not develop or reduce to writing a business

plan or a written advertising or marketing plan for his


      1
      Petitioner reported on Schedule C that his activity
operated under the name SkillsSoft/Edokan. He reported his
activities on Schedule C as one activity with two separate names,
SkillsSoft and Edokan, that comprised a total of six activities.
Petitioner described SkillsSoft as a software and Web site
development company and Edokan as an online retail company.
Consistent with our findings, we refer to SkillsSoft and Edokan
as separate activities.
                                - 4 -

activities.   Although he planned to generate revenue through

advertising sales, he did not maintain or develop a potential

customer list for his activities.

      Petitioner incurred considerable expenses developing the

activities, including oil and fuel expenses, legal and

professional fees, Internet and cable expenses, phone bills,

utility expenses, equipment expenses, and other miscellaneous

expenses.

      Petitioner believed that because expenses for the activities

exceeded his income, he was not required to file a Federal income

tax return for 2005.    He conceded that he earned income of

$17,610 as reported on Form 1099-MISC, Miscellaneous Income, but

thought that the losses from his activities offset his income for

2005.

II.   Notice of Deficiency

      Respondent prepared for petitioner a substitute for return

for 20052 and on the basis of that return issued to petitioner a

notice of deficiency.   In the notice of deficiency respondent

determined a deficiency in petitioner’s Federal income tax of




      2
      Respondent did not demonstrate that the substitute for
return constituted a sec. 6020(b) return. See Spurlock v.
Commissioner, T.C. Memo. 2003-124.
                                 - 5 -

$3,349 and additions to tax under sections 6651(a)(1) and (2) and

6654(a) of $753.53, $385.14, and $134.34, respectively.3

                               Discussion

      Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous.4     Rule 142(a); see INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290

U.S. 111, 115 (1933).

      As a preliminary matter, respondent alleged that

petitioner’s activities did not constitute a single activity.

Accordingly, the Court must first address the threshold issue of

whether petitioner’s activities constituted a single activity.

I.   Petitioner’s Activities

      Multiple undertakings of a taxpayer may be treated as one

activity if the undertakings are sufficiently connected.     Sec.

1.183-1(d)(1), Income Tax Regs.     The most important factors in

making this determination are the degree of organizational and

economic interrelationship of the undertakings, the business

purpose served by carrying on the undertakings separately or


      3
      Respondent has conceded the sec. 6651(a)(2) addition to tax
and has requested an increase in the sec. 6651(a)(1) addition to
tax.
      4
      Petitioner has not claimed or shown that he meets the
requirements under sec. 7491(a) to shift the burden of proof to
respondent as to any factual issue relating to his liability for
tax.
                               - 6 -

together, and the similarity of the undertakings.     Id.   The

Commissioner generally accepts the taxpayer’s characterization of

two or more undertakings as one activity unless the

characterization is artificial or unreasonable.     Id.

     Factors considered in determining whether the taxpayer’s

characterization is reasonable include:   (1) Whether the

undertakings are conducted at the same place; (2) whether the

undertakings were part of the taxpayer’s efforts to find sources

of revenue from his or her land; (3) whether the undertakings

were formed as separate activities; (4) whether one undertaking

benefited from the other; (5) whether the taxpayer used one

undertaking to advertise the other; (6) the degree to which the

undertakings shared management; (7) whether the taxpayer used the

same accountant for the undertakings; and (8) the degree to which

the undertakings shared books and records.   Topping v.

Commissioner, T.C. Memo. 2007-92.

     Petitioner contends that he operated his activities as a

single activity.   His employees, operating from a central

location in Pakistan, developed the activities interactively,

using the same tools, programs, and resources.    Petitioner

explained that he did not calculate the expenses and revenue of

his activities separately, but rather as if operating as one

activity.   In addition, he maintained that the activities would

depend on one another to promote their business because he
                                - 7 -

planned to use each activity as an advertising base for the other

activities.

     Although petitioner’s employees developed the activities

from a central location, the activities themselves vary

substantially.    Given the unique nature of each activity it is

unlikely that the activities operated interdependently or shared

a common customer base or clientele.    There is no common link as

to product or service and there is no indication that the

activities generated goodwill for one another.

     The Court is unable to conclude, on the basis of the record,

that the activities were conducted as one activity despite the

central source of operations.    They were separate activities

which would each generate a unique customer base and advertising

clientele.    Consequently, the Court addresses separately whether

each activity was operating as a going concern during 2005.

     Respondent alleges that petitioner’s 2005 expenditures were

startup expenditures and therefore subject to the limitations of

section 195.5    In the alternative, respondent contends that

petitioner failed to conduct his activities with a profit




     5
      Respondent did not contest that Edokan was operating as a
going concern in 2005. Respondent maintains, however, that
Edokan was not engaged in for profit and that petitioner’s
expenses are nondeductible expenses under sec. 162.
                                 - 8 -

objective and that he is therefore excluded from claiming expense

deductions except to the extent provided by section 183.6

II.   Startup Expenditures

      While section 162 generally allows a deduction for ordinary

and necessary expenses paid in connection with carrying on a

trade or business, the trade or business must be functioning as a

business at the time the taxpayer incurred the expenses.    Hardy

v. Commissioner, 93 T.C. 684, 687 (1989), affd. in part and

remanded in part per order (10th Cir., Oct. 29, 1990); Woody v.

Commissioner, T.C. Memo. 2009-93; Glotov v. Commissioner, T.C.

Memo. 2007-147; sec. 1.162-1(a), Income Tax Regs.    For this

purpose, “A taxpayer is not carrying on a trade or business under

section 162(a) until the business is functioning as a going

concern and performing the activities for which it was

organized.”   Glotov v. Commissioner, supra.   Until that time,

expenses related to the activity are not ordinary and necessary

expenses deductible under section 162 or section 212 (expenses

incurred for the production of income), but instead are “start-

up” or “pre-opening” expenses.     Hardy v. Commissioner, supra at

687-688.


      6
      Respondent considered the possibility that petitioner’s
software development activities may qualify for sec. 174
treatment. Petitioner has not shown that any of his software
development expenses warranted sec. 174 treatment; accordingly,
the Court deems any argument as to sec. 174 treatment waived.
See Money v. Commissioner, 89 T.C. 46, 48 (1987); Stutsman v.
Commissioner, T.C. Memo. 1961-109.
                                 - 9 -

     Section 195(a) provides that, except as otherwise provided

therein, no deduction is allowed for startup expenditures.      See

also Hardy v. Commissioner, supra at 687-693.      Section 195(c)(1)

defines startup expenditures to mean any amount paid or incurred

in connection with (i) investigating the creation or acquisition

of an active trade or business, or (ii) creating an active trade

or business, or (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 becoming an active trade

or business, and which if paid or incurred in connection with the

operation of an existing active trade or business would be

allowed as a deduction for the taxable year in which paid or

incurred.

     Therefore, the threshold issue is whether petitioner

completed the startup phase and became actively engaged in a

trade or business during 2005.    Courts have adopted a facts and

circumstances test focusing on whether the taxpayer has satisfied

all of the following three factors:      (1) Whether the taxpayer

undertook the activity intending to earn a profit; (2) whether

the taxpayer was regularly and actively involved in the activity;

and (3) whether the taxpayer’s activity had actually commenced.

See Woody v. Commissioner, supra; McManus v. Commissioner, T.C.

Memo. 1987-457, affd. without published opinion 865 F.2d 255 (4th

Cir. 1988).
                                - 10 -

     A.    SkillsSoft

     Petitioner testified that SkillsSoft’s services were

available to the public in 2005.     He admitted, however, that

SkillsSoft was focused on demonstrating its expertise as a

software development company.     SkillsSoft created the Web sites

for and developed petitioner’s own activities in order to show

potential clients that it was capable of providing efficient and

cost-effective software development services.

     In order for a taxpayer to be carrying on a trade or

business, however, the business must function as a going concern

and its services must be held out to the public.     Walsh v.

Commissioner, T.C. Memo. 1988-242, affd. without published

opinion 884 F.2d 1393 (6th Cir. 1989).     SkillsSoft’s activity

consisted of creating and building petitioner’s own activities.

There is no credible evidence, beyond petitioner’s testimony,

that SkillsSoft’s services were actually being held out to the

general public.

     B.     Desi, Efattofit.com, Online Dictionary, Software
            Development

     Petitioner testified that Desi, efattofit.com, the online

dictionary, and the software development associated with his

activities were operating during 2005.     Nevertheless, he admitted

that SkillsSoft was still developing these activities during

2005.     He presented no further evidence to corroborate his

testimony that these activities were operating in 2005 and the
                                   - 11 -

Court is unable to conclude that these activities were operating

as a going concern, open to the public during 2005 or that they

commenced business operations in 2005.       Consequently, the

expenses associated with these activities are nondeductible

startup expenditures.7

III.       Edokan

       A.     Engaged In for Profit

       To be engaged in a trade or business within the meaning of

section 162, petitioner must show not only that his primary

purpose for engaging in the activity was for income or profit but

also that he engaged in the activity with “continuity and

regularity”.        Commissioner v. Groetzinger, 480 U.S. 23, 35

(1987).       An examination of the facts and circumstances of each

case is necessary to determine whether a taxpayer is carrying on

a trade or business.       See id. at 36.

       Section 183(a) provides that if an activity is not engaged

in for profit, no deduction attributable to the activity shall be

allowed except as provided in section 183(b).       Section 183(b)(1)

authorizes a deduction for any expense that otherwise is

allowable, regardless of profit objective.       Section 183(b)(2)

authorizes a deduction for expenses that would be allowable if


       7
      Because we find that petitioner’s expenses were
nondeductible startup expenditures for 2005, we need not discuss
whether petitioner’s activities were entered into with a profit
objective or whether petitioner substantiated the expenses
associated with those activities.
                              - 12 -

the activity were engaged in for profit, but only to the extent

that gross income attributable to the activity exceeds the

deductions permitted by section 183(b)(1).   Section 183(c)

defines “activity not engaged in for profit” as “any activity

other than one with respect to which deductions are allowable for

the taxable year under section 162 or under paragraph (1) or (2)

of section 212.”

     Section 1.183-2(b), Income Tax Regs., sets forth a

nonexclusive list of factors to be considered in determining

whether a taxpayer has the requisite profit objective.    The

factors are:   (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisers; (3)

the time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that assets used in the activity

may appreciate in value; (5) the success of the taxpayer in

carrying on other similar or dissimilar activities; (6) the

taxpayer’s history of income or loss with respect to the

activity; (7) the amount of occasional profits, if any, which are

earned; (8) the financial status of the taxpayer; and (9)

elements of personal pleasure or recreation.   No single factor is

determinative, and not all factors are applicable in every case.

See Allen v. Commissioner, 72 T.C. 28, 34 (1979); sec. 1.183-

2(b), Income Tax Regs.
                               - 13 -

     Petitioner hired several employees, including a manager who

prepared reports on and managed Edokan operations in Pakistan.

He also maintained a separate bank account for Edokan and kept

extensive business records separate and apart from his personal

records.    The Court is satisfied that petitioner has demonstrated

that he operated Edokan with a profit objective during 2005.

     B.    Edokan Business Expense Deductions

     Deductions are strictly a matter of legislative grace, and

taxpayers must satisfy the specific requirements for any

deduction claimed.    See INDOPCO, Inc. v. Commissioner, 503 U.S.

at 84; New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).    Taxpayers bear the burden of substantiating the amount

and purpose of any claimed deduction.     See Hradesky v.

Commissioner, 65 T.C. 87 (1975), affd. per curiam 540 F.2d 821

(5th Cir. 1976).

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

necessary expenses paid or incurred by a taxpayer in carrying on

any trade or business.    An expense is considered ordinary if

commonly or frequently incurred in the trade or business of the

taxpayer.    Deputy v. du Pont, 308 U.S. 488, 495-496 (1940).    An

expense is necessary if it is appropriate or helpful in carrying

on a taxpayer’s trade or business.      Commissioner v. Heininger,

320 U.S. 467, 471 (1943); Welch v. Helvering, 290 U.S. at 113.
                              - 14 -

     A taxpayer must maintain records sufficient to substantiate

the amounts of the deductions claimed.   Sec. 1.6001-1(a), Income

Tax Regs.   If a taxpayer establishes that an expense is

deductible but is unable to substantiate the precise amount, we

may estimate the amount, bearing heavily against the taxpayer

whose inexactitude is of his own making.   Cohan v. Commissioner,

39 F.2d 540, 543-544 (2d Cir. 1930).   The taxpayer must present

sufficient evidence for the Court to form an estimate because

without such a basis, any allowance would amount to unguided

largesse.   Williams v. United States, 245 F.2d 559, 560-561 (5th

Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

     Petitioner provided extensive records of the expenses

associated with his activities, several of which relate to Edokan

expenses.   Expenses related to Edokan’s business during 2005

consisted primarily of expenses for retail items,8 most notably

dresses and similar retail items.   During 2005 he used two

currencies for the purchase of retail items, the Pakistani rupee

and the U.S. dollar.   The Court is satisfied that petitioner has



     8
      Sec. 263A provides the rule for inclusion in inventory
costs of certain expenses, specifying that goods purchased for
resale shall be included in inventory costs. Sec. 263A(a)(1),
(b). Under sec. 263A petitioner’s Edokan expenses are properly
allocable as inventory costs. But sec. 263A(b)(2)(B) provides an
exception to the inventory reporting requirements for taxpayers
with gross receipts of $10 million or less. Petitioner’s gross
receipts for 2005 did not exceed $10 million; accordingly, he was
not subject to the inventory reporting requirements of sec. 263A.
                              - 15 -

presented sufficient evidence substantiating the following retail

expenses payable in rupees:

                                          Price
      Purchase Date              Rupees            Dollars¹

         8/8/05                Rs 13805            $231.12
         8/18/05                    503               8.42
         8/24/05                  36825             616.85
         11/8/05                   7000             117.21
         11/22/05                  9245             154.26
         11/25/05                   650              10.88

           Total                 68,028           1,138.74

     ¹Rupees were converted to dollars using the exchange rate
for the specified date on www.oanda.com. See http://www.oanda.
com/currency/converter/.

Petitioner further substantiated $2,731 of retail expenses

payable in dollars.   The Court finds that petitioner is entitled

to a business expense deduction of $3,869.74.

     Petitioner incurred additional expenses during 2005, a

portion of which may be properly allocable to Edokan’s operation.

But petitioner did not provide sufficient evidence to permit an

estimate of the expenses that are properly allocable to Edokan.

Consequently, petitioner is entitled only to those expenses that

are clearly allocable to Edokan, e.g., retail purchases, as

discussed above.
                                - 16 -

IV.   Additions to Tax

      A.   Section 6651(a)(1) Addition to Tax9

      Section 6651(a)(1) imposes an addition to tax for failure to

file timely a return.10   The addition to tax under section

6651(a)(1) does not apply if the failure to file timely is due to

reasonable cause and not willful neglect.    Sec. 6651(a)(1).   A

failure to file a timely Federal income tax return is due to

reasonable cause if the taxpayer exercised ordinary business care

and prudence and nevertheless was unable to file the return

within the prescribed time.    Barkley v. Commissioner, T.C. Memo.

2004-287; sec. 301.6651-1(c)(1), Proced. & Admin. Regs.    Willful

neglect means a conscious, intentional failure or reckless

indifference.    United States v. Boyle, 469 U.S. 241, 245 (1985).

      Section 7491(c) imposes on the Commissioner the burden of

production in any court proceeding with respect to the liability

of any individual for additions to tax.     Higbee v. Commissioner,

116 T.C. 438, 446 (2001); Trowbridge v. Commissioner, T.C. Memo.

2003-164.    In order to meet the burden of production, the

Commissioner need only make a prima facie case that imposition of



      9
      Respondent conceded the sec. 6651(a)(2) addition to tax and
consequently seeks an increased amount under sec. 6651(a)(1).
      10
      The addition to tax imposed under sec. 6651(a)(1) is equal
to 5 percent of the amount of tax required to be shown on the
return, with an additional 5 percent to be added for each month
or partial month during which the failure to file timely a return
continues, not to exceed 25 percent in the aggregate.
                                - 17 -

the addition to tax is appropriate.      Higbee v. Commissioner,

supra at 446.    Petitioner’s 2005 return was due on April 15,

2006, and was not filed until October 29, 2009.     Therefore,

respondent has met his burden of production.11

     Petitioner believed, on the basis of his purported business

expenses, that he did not have taxable income for 2005 and

therefore was not under an obligation to file a return for that

year.     Petitioner introduced no other legally sufficient reason

for his failure to file a timely return and has not otherwise

demonstrated reasonable cause for his failure to timely file his

return as required by section 6651(a)(1).     Accordingly,

respondent’s determination of an addition to tax under section

6651(a)(1) is sustained.

     B.     Section 6654(a) Addition to Tax

     Section 6654(a) imposes an addition to tax on an individual

taxpayer who underpays his estimated tax.     The addition to tax is

calculated with reference to four required installment payments

of the taxpayer’s estimated tax liability.     Sec. 6654(c)(1).


     11
      Respondent sought an increase in the sec. 6651(a)(1)
addition to tax and bears the burden of proof with regard to any
increased deficiency. See Rule 142(a). The amount of the sec.
6651(a)(1) addition to tax, however, is a computational matter
and is based on the amount of tax due. To the extent respondent
bears the burden of proving an increased sec. 6651(a)(1) addition
to tax, respondent has met his burden because the record shows
that petitioner is liable for an increased deficiency.
Bhattacharyya v. Commissioner, T.C. Memo. 2007-19 n.19.
                                - 18 -

Each required installment of estimated tax is equal to 25 percent

of the required annual payment.     Sec. 6654(d)(1)(A).   The

required annual payment is equal to the lesser of:     (1) 90

percent of the tax shown on the individual’s return for that year

(or, if no return is filed, 90 percent of his or her tax for such

year); or (2) if the individual filed a return for the

immediately preceding taxable year, 100 percent of the tax shown

on that return. Sec. 6654(d)(1)(B).

        Respondent bears the burden of production to show that

petitioner had an estimated tax payment obligation, which

includes whether a return was filed for the preceding year.      Sec.

7491(c); Wheeler v. Commissioner, 127 T.C. 200, 211-212 (2006),

affd. 521 F.3d 1289 (10th Cir. 2008).     Petitioner did not file a

return for 2004; therefore, respondent has satisfied his burden

of production.

     Because petitioner failed to file a Federal income tax

return for 2004, his required annual payment for 2005 is equal to

90 percent of the tax for 2005, which was payable in installments

under section 6654.     See sec. 6654(d)(1)(B).   Petitioner did not

make any estimated income tax payments for 2005 and has failed to

present any evidence or argument that an exception applies.

Consequently, the Court sustains respondent’s determination of

the failure to pay estimated tax addition to tax under section

6654.
                        - 19 -

To reflect the foregoing,


                                 Decision will be entered

                            under Rule 155.
