                  T.C. Summary Opinion 2004-64



                     UNITED STATES TAX COURT



                 RAYMOND J. DAVIS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4536-03S.             Filed May 14, 2004.


     Raymond J. Davis, pro se.

     Jeremy L. McPherson, for respondent.



     DEAN, Special Trial Judge:     This case was heard under the

provisions of section 7463 of the Internal Revenue Code as in

effect at the time the petition was filed.    Unless otherwise

indicated, all other section references are to the Internal

Revenue Code in effect for the years at issue.    The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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     Respondent determined deficiencies in petitioner's Federal

income taxes of $2,526 for 1999 and $3,819 for 2000.   The issues

for decision are whether petitioner, for both years, properly

reported pension income and is entitled to claim trade or

business expense deductions.   Respondent's adjustments to

petitioner's itemized deductions and the taxable amount of his

Social Security benefits are computational and will be determined

by the Court's resolution of the income and expense issues.

     The stipulated facts and exhibits received into evidence are

incorporated herein by reference.   At the time the petition in

this case was filed, petitioner resided in Sacramento,

California.

                            Background

     There is no disagreement among the parties as to the facts

in this case, which are almost fully stipulated.   Before his

retirement in 1990, petitioner was self-employed as an

independent insurance agent for the New York Life Insurance

Company (company).   After a surgery, petitioner retired on

disability due to heart-related health problems.   Upon his

retirement, the company transferred his clients to another

insurance agent and began paying pension distributions to

petitioner.   There is no indication that there was any

understanding that he would return to his position as an agent

for the company.
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     During 1999 and 2000, the company paid taxable pension

benefits to petitioner of $29,012.40 and $30,012.40,

respectively.   The company issued to petitioner and the Internal

Revenue Service Forms 1099R, Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans, Insurance

Contracts, etc.

     For each of the years 1999 and 2000, petitioner attached a

Schedule C, Profit or Loss From Business, to his Federal income

tax return.   On the 1999 schedule he describes his business or

profession as "LIFE INS SALES".    The gross receipts that

petitioner reported on both Schedules C consisted of the pension

benefits paid to him by the company.    Petitioner did not sell or

attempt to sell any insurance products during any part of 1999 or

2000.

     Petitioner, however, did not remain idle during his

retirement.   During the years at issue, petitioner maintained

contact with his former insurance clients, performing various

services such as assisting with changes to beneficiaries,

addresses, and income tax withholdings.    Petitioner, however,

received no compensation for the services he performed.      In

February of 2000 petitioner had another heart surgery and after a

year he found out that he would no longer be able to perform

services for his former clients.
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     Upon examining petitioner's returns for the years in

contest, the Commissioner determined that petitioner's income was

reportable as pension income and not as Schedule C income.

Respondent also determined that because petitioner was not

engaged in a trade or business or an activity for the production

of income, he is not entitled to the deductions claimed on the

Schedules C.

                            Discussion

     Because there is no factual dispute in this case, section

7491 is inapplicable.

     Section 162 allows a deduction for certain expenses incurred

"in carrying on" a trade or business.    During the years at issue,

petitioner was retired due to disability and not engaged in a

trade or business or an activity for profit.   Petitioner received

only pension income; he did not receive any gross receipts or

sales amounts.   But petitioner argues that he intended to reenter

the insurance business, at some point, and the expenses he

incurred are therefore deductible business expenses.

     Petitioner's argument raises the issue of the "hiatus

principle", where the temporary cessation of a trade or business

does not preclude a determination that the taxpayer was "carrying

on" a trade or business during that period.    See Haft v.

Commissioner, 40 T.C. 2, 6 (1963); Sherman v. Commissioner, T.C.

Memo. 1977-301 (and cases cited therein).   Under the principle, a
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taxpayer must show that during the hiatus he intended to resume

the same trade or business.    Gallo v. Commissioner, T.C. Memo.

1998-100.

     Petitioner testified that upon his retirement he intended to

resume his insurance business as soon as he could.    When

questioned as to his state of mind after the sixth, seventh or

eighth year of retirement, petitioner replied that he was still

too ill to return to work but was "hopeful" that he could return

eventually.    In reply to the question as to his state of mind

after the 10th or 11th year of retirement, petitioner testified

that he still held out "hope", but he admitted that he "was

wondering about it".

     The cases apply the hiatus principle to "temporary"

cessations of business.    When, however, the cessation is

prolonged, with no continuing connection with the trade or

business or intent to actively carry on the trade or business,

the taxpayer is not "carrying on" his trade or business while on

"hiatus".    See Estate of Rockefeller v. Commissioner, 762 F.2d

264, 270-271 (2d Cir. 1985), affg. 83 T.C. 368 (1984); Canter v.

United States, 173 Ct. Cl. 723, 354 F.2d 352 (1965) (4 years is

not "temporary"); Corbett v. Commissioner, 55 T.C. 884 (1971).

     The Court finds petitioner to have been an exceptionally

conscientious insurance agent and genuinely loyal to his former

clients.    But that does not mean that he was "carrying on" a
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trade or business during 1999 and 2000.   The Court concludes that

what petitioner describes as an "intent" to return at some

indefinite future time to his former business was, in view of the

state of his health and the passage of time, more of a wish or

desire.   Petitioner admitted that by then he "was wondering

about" whether he would ever be able to return.   Even if

petitioner initially had the intent to return to his former

business after his retirement in 1990, by the time of the tax

years at issue here, his hiatus was no longer "temporary".     The

Court concludes that petitioner was not engaged in a trade or

business or an activity for profit in 1999 and 2000.

     The Court sustains respondent's determination that for 1999

and 2000, petitioner's pension income is not reportable on

Schedule C and petitioner did not incur ordinary and necessary

business expenses deductible on Schedule C.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                              Decision will be

                                          entered for respondent.
