                 T.C. Memo.   2004-108



                UNITED STATES TAX COURT



     PAUL D. AND GUDRUN G. WEAVER, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 14883-02.            Filed May 3, 2004.


     Petitioners included with their 1998 Federal
income tax return a Schedule C, Profit or Loss From
Business, for “Shrike Cars”. The Schedule C reflected
a net loss of $448,120, which respondent disallowed on
grounds that the costs associated with Shrike Cars were
startup expenditures within the meaning of sec. 195,
I.R.C.

     Held: Petitioners are not entitled to reduce
their 1998 gross income by the $448,120 claimed net
loss derived from the Shrike Cars enterprise.

     Held, further, petitioners are liable for the sec.
6651(a)(1), I.R.C., addition to tax for failure timely
to file their 1998 income tax return.


Paul D. and Gudrun G. Weaver, pro sese.

Michael J. Proto, for respondent.
                                 - 2 -


                MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:     Respondent determined a Federal income tax

deficiency for petitioners’ 1998 taxable year in the amount of

$47,175 and an addition to tax pursuant to section 6651(a)(1) in

the amount of $3,393.75.1    After concessions, the issues for

decision are:

     (1) Whether petitioners are entitled to reduce their 1998

gross income by $448,120, representing the net loss claimed on

Schedule C, Profit or Loss From Business, for an enterprise

entitled “Shrike Cars”; and

     (2) whether petitioners are liable for the section

6651(a)(1) addition to tax for failure to file their 1998 income

tax return timely.

Certain additional adjustments made by respondent to petitioners’

itemized deductions and exemptions are correlative in nature and

need not be separately addressed.

                           FINDINGS OF FACT

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

The stipulations of the parties, with accompanying exhibits, are

incorporated herein by this reference.    At the time the petition




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

was filed in this case, petitioners resided in Weston, Connecticut.

     Petitioners, husband and wife, filed a joint Form 1040, U.S.

Individual Income Tax Return, for the taxable year 1998.     The

return was filed on January 7, 2000, with the Internal Revenue

Service in Andover, Massachusetts.     Petitioners reported wage

income of $140,316, and attached to the return Forms W-2, Wage

and Tax Statement, showing wages paid by Marketing Concepts

Group, Inc., of $139,446.44 to Mr. Weaver and $870 to Mrs.

Weaver.   Petitioners also included with their return two

Schedules C and the pertinent (second page) portion of a Schedule

E, Supplemental Income and Loss.

     On June 25, 1996, previous to filing their 1998 return and

presumably in connection with an earlier audit, petitioners had

received from the Internal Revenue Service a fax listing several

recommendations with respect to petitioners’ tax reporting.

Among other things, the fax directed that petitioners should

“maintain separate Schedule C’s [sic] for all different business

activities.”

     The two Schedules C accompanying petitioners’ 1998 return

both list Mr. Weaver as the proprietor of the business and give a

business address identical to that of petitioners’ residence.

One Schedule C is for a marketing business with the name shown as

“Marketing Concepts Group/dba”.    That Schedule C reflects $95,841
                              - 4 -

in gross receipts, $64,576 for cost of goods sold, and $42,496 of

expenses (including $15,947 for business use of home), for a

total net loss of $11,231.

     The other Schedule C relates to an “Automobile construction”

business operating under the name “Shrike Cars”.   This Schedule C

reports no gross receipts or sales, $374,885 for cost of goods

sold,2 and $73,235 in expenses (specifically, advertising of

$24,464, travel of $42,469, and meals and entertainment of

$6,302), for a total loss of $448,120.

     Taking into account the above wages and losses, as well as a

$13,440 Schedule E loss from the S corporation Marketing Concepts

Group, Inc., and other income items not pertinent here,

petitioners’ Form 1040 reports adjusted gross income (loss) of



     2
       Cost of goods sold is allowable as an offset to gross
income in the case of a manufacturing, merchandising, or mining
business, but not a service business. Hahn v. Commissioner, 30
T.C. 195, 197-198 (1958), affd. 271 F.2d 739 (5th Cir. 1959);
sec. 1.61-3(a), Income Tax Regs. However, even where otherwise
appropriate, cost of goods sold generally is not allowable with
respect to goods that have not been sold or otherwise disposed of
during the taxable year. Jones v. Commissioner, 25 T.C. 1100,
1103-1104 (1956), revd. on other grounds 259 F.2d 300 (5th Cir.
1958); Bernard v. Commissioner, T.C. Memo. 1998-20. Because
petitioners in any event reported no gross receipts for Shrike
Cars and offered no evidence indicating that any goods were
disposed of by the venture, and because the parties did not
distinguish at trial or on brief between the various components
of the Shrike Cars loss, we shall treat the $374,885 amount as a
claim for additional business expenses under sec. 162. See
Keegan v. Commissioner, T.C. Memo. 1997-511 (considering reported
cost of goods sold to be a claim for sec. 162 expenses).
                               - 5 -

($232,490), taxable income of $0, and a refund amount due of

$33,600 from withholdings.3

     On June 18, 2002, respondent issued to petitioners a

statutory notice of deficiency for 1998.   Therein respondent

disallowed, in full, the $448,120 loss claimed by petitioners on

the Schedule C for Shrike Cars.   Expenses of $8,086 were

disallowed for lack of substantiation.   As to the balance of

$440,034, although respondent conceded that the underlying

expenditures were substantiated by petitioners, respondent

nonetheless determined that the loss was not allowable.

Respondent concluded that the expenditures should be capitalized

rather than expensed, “since pursuant to section 195 of the

Internal Revenue Code the amounts are determined to be start-up

and/or organizational expenditures.”   Alternatively, the notice

disallowed the loss for failure to establish that the activity

was engaged in for profit.4   No adjustments were made to the




     3
       The Forms W-2, Wage and Tax Statement, attached to
petitioners’ return show Federal income tax withholding of
$33,588. The source of the $12 discrepancy is not explained by
the record.
     4
       At trial, respondent conceded the hobby loss issue and is
no longer pursuing disallowance of petitioners’ claimed Shrike
Cars loss on grounds that the activity was not engaged in for
profit.
                                 - 6 -

amounts reported by petitioners in connection with Marketing

Concepts Group.5

     Petitioners filed a petition with this Court challenging the

disallowance of their Schedule C loss on the grounds that the

adjustments were “made incorrectly based on IRS assumption of a

startup business when in actuality it was a continuation of an

existing business.”     At the subsequent trial, Mr. Weaver

testified and sought to explain petitioners’ business operations.

He also introduced a series of exhibits related to these

operations.6

     For several decades, petitioners have been involved with

what can be broadly characterized as creative “marketing”

endeavors.     The purpose of these operations has been and

continues to be the provision of advertising, marketing, and

business development services for third-party clients and for

original concepts developed internally.     These efforts have


     5
       The precise nature of the relationship between the
Schedule C business, d/b/a Marketing Concepts Group, and the S
corporation Marketing Concepts Group, Inc., is not clear from the
record. The S corporation was apparently established to address
certain liability issues involved with major accounts and/or
public advertising campaigns.
     6
       At trial, respondent objected on similar grounds to two of
petitioners’ exhibits. On the second occasion, a discussion
ensued with respect thereto, and the objection was explicitly
overruled by the Court. In the interest of consistency and
because respondent’s objections are, as a practical matter,
mooted by our resolution of this case, we clarify that
respondent’s objection to Exhibit 12-P is also overruled for the
same reasons expressed in connection with Exhibit 15-P.
                               - 7 -

primarily focused on the packaged foods, telecommunications,

technology, and automotive industries.   Work has been done for

clients such as Hershey Chocolate, Cadbury Schweppes, AT&T,

Lucent Technologies, Sony Corporation, and the National Hockey

League.

     The primary operations seem to be conducted under the name

Marketing Concepts Group.   Additionally, the name “dijit” has

been used for certain activities of Marketing Concepts Group that

deal with information technology development and projects.

Literature for Marketing Concepts Group and dijit identifies Mr.

Weaver as president of the enterprise.

     Shrike Cars, also referred to as Automotive Design &

Engineering, is the working name given to at least some of

petitioners’ endeavors in the automotive field.   As will be

explained in greater detail below, since approximately 1994 the

Shrike Cars project has sought to identify emerging automotive

technologies and to develop them with strategic partners.    At the

time of trial in late 2003, petitioners had not stopped using the

working name Shrike Cars and had not disposed of Shrike Cars.

The parties dispute whether the Shrike Cars business is properly

characterized as a startup operation in 1998.
                                  - 8 -

                                 OPINION

I.   Burden of Proof

      As a general rule, determinations by the Commissioner are

presumed correct, and the taxpayer bears the burden of proving

otherwise.   Rule 142(a).    Section 7491 may operate, however, in

specified circumstances to place the burden on the Commissioner.

Section 7491 is applicable to court proceedings that arise in

connection with examinations commencing after July 22, 1998, and

reads in pertinent part:

      SEC. 7491.    BURDEN OF PROOF.

           (a) Burden Shifts Where Taxpayer Produces Credible
      Evidence.--

                (1) General rule.--If, in any court
           proceeding, a taxpayer introduces credible
           evidence with respect to any factual issue
           relevant to ascertaining the liability of the
           taxpayer for any tax imposed by subtitle A or B,
           the Secretary shall have the burden of proof with
           respect to such issue.

                (2) Limitations.--Paragraph (1) shall apply
           with respect to an issue only if--

                        (A) the taxpayer has complied with the
                   requirements under this title to substantiate
                   any item;

                        (B) the taxpayer has maintained all
                   records required under this title and has
                   cooperated with reasonable requests by the
                   Secretary for witnesses, information,
                   documents, meetings, and interviews; * * *

                        *    *    *       *   *   *   *
                                - 9 -

          (c) Penalties.--Notwithstanding any other
     provision of this title, the Secretary shall have the
     burden of production in any court proceeding with
     respect to the liability of any individual for any
     penalty, addition to tax, or additional amount imposed
     by this title.

See also Internal Revenue Service Restructuring & Reform Act of

1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727, regarding

effective date.   Section 7491 is applicable here in that the

examination in this case began after the statute’s effective

date.

     With respect to the income adjustments at issue, petitioners

have not met the prerequisite of section 7491(a)(1) for placing

the burden on respondent.    Legislative history defines “credible

evidence” as “the quality of evidence which, after critical

analysis, the court would find sufficient upon which to base a

decision on the issue if no contrary evidence were submitted

(without regard to the judicial presumption of IRS correctness).”

H. Conf. Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-

995; see also Higbee v. Commissioner, 116 T.C. 438, 442 (2001).

Here, the evidence produced by petitioners falls short of this

standard.

     Petitioners submitted 10 documentary exhibits that they

believe relate to their automotive ventures and offered the

testimony of Mr. Weaver.    Three of the documents bear dates in

the period from December 14, 1994, to September 27, 1995.    Five
                                - 10 -

of the documents are dated from August 24, 1999, to August 27,

2003.   Of the two remaining undated documents, one shows 5-year

financial projections for 1999 through 2003, and the other is a

photograph of an item from a line of auto care products allegedly

“sold since 1996”.   Mr. Weaver’s testimony primarily described

these exhibits and offered no specific details concerning any

activities taking place in 1998.    Petitioners therefore would

apparently have the Court deduce, by inference, that because

petitioners claimed $440,034 in expenses for 1998 related to

Shrike Cars that were not otherwise disallowed for lack of

substantiation, an active trade or business was being carried on

during that year.

     In addition to this anachronistic difficulty, the content of

the exhibits is problematic.    A significant percentage of the

documents are related to random proposals for largely unconnected

product development projects.    With the possible exception of

vague testimony from Mr. Weaver that a 2003 proposal had been

“accepted”, the record is devoid of indication that any project

went forward.   We thus are unable to determine, beyond surmising

that activities continued somewhere on the nebulous continuum

from “automobile construction” to “marketing”, even the nature of

projects pursued by Shrike Cars in 1998.    In the absence of any

evidence directed toward business operations during the

particular year in issue, the Court concludes that petitioners
                                 - 11 -

have not made a prima facie case sufficient to shift the burden

to respondent under section 7491(a).

      With respect to the delinquency addition to tax, the

Commissioner satisfies the section 7491(c) burden of production

by “[coming] forward with sufficient evidence indicating that it

is appropriate to impose the relevant penalty” but “need not

introduce evidence regarding reasonable cause, substantial

authority, or similar provisions.”        Higbee v. Commissioner, supra

at 446.   Rather, “it is the taxpayer’s responsibility to raise

those issues.”   Id.     Because, as will be more fully detailed

infra, respondent here has by stipulation introduced sufficient

evidence to render the section 6651(a)(1) addition at least

facially applicable, the burden rests on petitioners to show an

exception thereto.

II.   Schedule C Loss

      A. General Rules

      Deductions are a matter of “legislative grace”, and “a

taxpayer seeking a deduction must be able to point to an

applicable statute and show that he comes within its terms.”       New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); see also

Rule 142(a).   As a general rule, section 162(a) authorizes a

deduction for “all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business”.   An expense is ordinary for purposes of this section
                                - 12 -

if it is normal or customary within a particular trade, business,

or industry.     Deputy v. du Pont, 308 U.S. 488, 495 (1940).   An

expense is necessary if it is appropriate and helpful for the

development of the business.     Commissioner v. Heininger, 320 U.S.

467, 471 (1943).

     Implicit in the foregoing definitions is the concept that a

taxpayer must in fact be “carrying on” a trade or business for

expenditures to be deductible under section 162.    This limitation

is made explicit in section 195, as follows:

     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.

          (b) Election To Amortize.--

               (1) In general.--Start-up expenditures may,
          at the election of the taxpayer, be treated as
          deferred expenses. Such deferred expenses shall
          be allowed as a deduction prorated equally over
          such period of not less than 60 months as may be
          selected by the taxpayer (beginning with the month
          in which the active trade or business begins).

               (2) Dispositions before close of amortization
          period.--In any case in which a trade or business is
          completely disposed of by the taxpayer before the end
          of the period to which paragraph (1) applies, any
          deferred expenses attributable to such trade or
          business which were not allowed as a deduction by
          reason of this section may be deducted to the extent
          allowable under section 165.

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

               (1) Start-up expenditures.--The term “start-
          up expenditure” means any amount--
                   - 13 -

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

The term “start-up expenditure” does not include
any amount with respect to which a deduction is
allowable under section 163(a), 164, or 174.

     (2) Beginning of trade or business.--

          (A) In general.--Except as provided in
     subparagraph (B), the determination of when
     an active trade or business begins shall be
     made in accordance with such regulations as
     the Secretary may prescribe.

          (B) Acquired trade or business.--An
     acquired active trade or business shall be
     treated as beginning when the taxpayer
     acquires it.

(d) Election.--

     (1) Time for making election.--An election
under subsection (b) shall be made not later than
the time prescribed by law for filing the return
                              - 14 -

          for the taxable year in which the trade or
          business begins (including extensions thereof).

               (2) Scope of election.--The period selected
          under subsection (b) shall be adhered to in
          computing taxable income for the taxable year for
          which the election is made and all subsequent
          taxable years.

     No regulations further defining either startup expenditures

or the beginning of an active trade or business have been

promulgated under section 195.7   As regards the question of

whether a taxpayer is actively engaged in a trade or business,

the U.S. Supreme Court has established the general rule that

resolution of this issue requires examination of the facts in

each particular case.   Commissioner v. Groetzinger, 480 U.S. 23,

36 (1987).   Concerning pertinent expenditures, legislative

history affords examples of expenses falling within the intended

operation of the statute:

     eligible expenses consist of investigatory costs
     incurred in reviewing a prospective business prior to
     reaching a final decision to acquire or to enter that
     business. These costs include expenses incurred for
     the analysis or survey of potential markets, products,
     labor supply, transportation facilities, etc. Eligible
     expenses also include startup costs which are incurred
     subsequent to a decision to establish a particular
     business and prior to the time when the business
     begins. For example, startup costs include
     advertising, salaries and wages paid to employees who
     are being trained and their instructors, travel and
     other expenses incurred in lining up prospective
     distributors, suppliers or customers, and salaries or

     7
       Regulations do prescribe procedures for making the
pertinent election, effective for elections filed on or after
Dec. 17, 1998. Sec. 1.195-1, Income Tax Regs.
                             - 15 -

     fees paid or incurred for executives, consultants, and
     for similar professional services. [H. Rept. 96-1278,
     at 10-11 (1980), 1980-2 C.B. 709, 712; see also S.
     Rept. 96-1036, at 11-12 (1980) (containing identical
     language).]

     This Court has identified three elements typically

indicative of the existence of a trade or business.      McManus v.

Commissioner, T.C. Memo. 1987-457, affd. without published

opinion 865 F.2d 255 (4th Cir. 1988).    The taxpayer must: (1)

Undertake an activity intending to make a profit; (2) be

regularly and actively involved in the activity; and (3) actually

have commenced business operations.     Id.   As regards the third,

temporal element emphasizing whether a particular trade or

business has begun its operations, the following oft-quoted test

offers guidance:

     even though a taxpayer has made a firm decision to
     enter into business and over a considerable period of
     time spent money in preparation for entering that
     business, he still has not “engaged in carrying on any
     trade or business” within the intendment of section
     162(a) until such time as the business has begun to
     function as a going concern and performed those
     activities for which it was organized. * * * [Richmond
     Television Corp. v. United States, 345 F.2d 901, 907
     (4th Cir. 1965), vacated and remanded on other grounds
     382 U.S. 68 (1965).]

See also Jackson v. Commissioner, 864 F.2d 1521, 1525-1526 (10th

Cir. 1989), affg. 86 T.C. 492 (1986); Johnsen v. Commissioner,

794 F.2d 1157, 1160-1161 (6th Cir. 1986), revg. and remanding on

other grounds 83 T.C. 103 (1984); McKelvey v. Commissioner, T.C.
                              - 16 -

Memo. 2002-63, affd. 76 Fed. Appx. 806 (9th Cir. 2003); McManus

v. Commissioner, supra.

     Stated otherwise, mere research into or investigation of a

potential business is insufficient.     Dean v. Commissioner, 56

T.C. 895, 902 (1971); McKelvey v. Commissioner, supra.     Thus,

while it is true that an enterprise need not have generated sales

or other revenue to have begun to carry on a business, it must

nonetheless have started to function in a particular and

identifiable line of work.   Cabintaxi Corp. v. Commissioner, 63

F.3d 614, 620-621 (7th Cir. 1995), affg. in part, revg. in part,

and remanding T.C. Memo. 1994-316; Jackson v. Commissioner, supra

at 1526 & nn.7-8; Blitzer v. Commissioner, 231 Ct. Cl. 236, 684

F.2d 874 (1982).

     B.   Analysis

     Evaluation of whether Shrike Cars constituted an active and

ongoing trade or business in 1998 is complicated by the ambiguity

in the record with respect to (1) the specific nature of the

business in which Shrike Cars engaged and (2) the relationship of

Shrike Cars to petitioners’ other business endeavors.    This

confusion is in part the result of the business decisions of

petitioners to conduct some activities through their separate S

corporation, Marking Concepts Group, Inc., and others through

their two Schedule C proprietorships.    Critically, however,
                              - 17 -

petitioners have at no time throughout this proceeding raised an

argument that the Shrike Cars operations should be considered as

a component of one of their other entities or ventures.

Furthermore, taxpayers in general must live with the manner in

which they have structured and delineated their business entities

and transactions.   See Commissioner v. Natl. Alfalfa Dehydrating

& Milling Co., 417 U.S. 134, 149 (1974) (“This Court has observed

repeatedly that, while a taxpayer is free to organize his affairs

as he chooses, nevertheless, once having done so, he must accept

the tax consequences of his choice, whether contemplated or not,

* * * and may not enjoy the benefit of some other route he might

have chosen to follow but did not.”)   Accordingly, our inquiry is

whether Shrike Cars, viewed as a stand-alone concern, had

achieved the status of an active trade or business in 1998.

     As alluded to previously, the principal inference to be

drawn from the record seems to be that the alleged Shrike Cars

business rested somewhere on a continuum from vehicle production

to marketing and that petitioners engaged in a variety of other

activities at the marketing end.   Yet the above authorities

direct our attention to whether Shrike Cars had begun to function

as a going concern in performing the activities for which it was

organized.   The intended discrete business of Shrike Cars is

therefore a pertinent fact.   However, because we conclude that

the record fails to show that Shrike Cars had begun in 1998 to
                                - 18 -

function as an ongoing and independent production or marketing

enterprise, a definitive determination as between the two becomes

unnecessary.

            1.   Implications From the Evidentiary Record

     The Schedule C attached to petitioners’ 1998 Form 1040

characterizes Shrike Cars as an “Automobile construction”

business.    The cursory, single-page “5 YEAR FINANCIAL

PROJECTIONS” document submitted by petitioners bases the listed

gross sales figures on the number of “Mark I” and “Mark II”

vehicles (labels not otherwise used in the record) sold, from an

estimated 4 in 1999 to 260 in 2003.      Hence, some of the evidence

does appear to reflect that Shrike Cars’ intended function was to

operate in the field of automobile production, and we begin our

analysis with consideration of the record in light of this

characterization.

     A December 14, 1994, document purportedly summarizing the

Shrike Cars business lists several “AD&E concepts that are ready

for development with an investor/manufacturer”.     No mention is

made of any postconcept operations.      The document would therefore

seem to imply that, as of late 1994, Shrike Cars was not yet

engaged in actual commercial development, much less production,

of any particular automotive concept.

     This impression is reinforced by the three automotive

proposals to third parties contained in the record.     Dated April
                               - 19 -

24, 1995, September 27, 1995, and August 18, 2003, each of the

proposed projects appears to begin with some type of a design or

engineering phase culminating in prototype vehicles.    Further,

only the September 27, 1995, proposal relating to motorcycle-

powered vehicles appears even to have reached the prototype

level.    Language included in that proposal implies that an

ostensible partner of Shrike Cars, TRA Racing, had by 1995

developed and manufactured a few prototype lightweight vehicles

(880 lbs.) powered by Kawasaki engines and using Mini Domino

bodies.    Petitioners contend that at an undisclosed later date

TRA Racing used bodies designed by Shrike Cars on a small number

of similar vehicles.    Nonetheless, there remains no indication

that either of the 1995 proposals, or any other possible

automotive proposal advanced prior to 2003, ever went forward so

as to generate ongoing development or production activity on the

part of Shrike Cars by the end of 1998.

     Concerning the more nebulous characterization of Shrike Cars

as a “marketing” enterprise, Mr. Weaver testified at trial that

“the important point is we don’t manufacture vehicles.    We are

the design, concept, prototyping people.    Other people then pick

up from there to manufacture it and move it into the marketplace,

but we will sell it for them.”    He described Shrike Cars as “a

resource for innovative development of automotive concepts,

design, engineering and marketing, providing a complete service
                               - 20 -

for consulting, concept and design development, styling, scale-

model building and prototypes.”

     The impression left by the foregoing statements is that an

ongoing marketing business involves the provision of a variety of

services, typically focused on a particular product or products,

to one or more third-party clients or strategic partners.     A

marketing enterprise functioning as a going concern would have

advanced beyond the internal generation of a few potential

product concepts.   However, materials in the record do not

reflect that, as of late 2003, the operations of Shrike Cars were

other than limited to having solicited interest, apparently

without material success, in several such concepts.

     Furthermore, the variety of the concepts floated in the

various proposals and documents suggests that Shrike Cars’

efforts and eventual line of work or niche remained unfocused and

malleable even through 2003.   Materials from the 1994 to 1995

period promote the idea of designing one-of-a-kind vehicles for

celebrities, of producing reduced-emission vehicles for

commercial applications, of redesigning existing vehicle models

for an overseas manufacturer, and of developing a motorcycle-

powered sports car.   The 2003 proposal then relates to the

“development of a unique sports car made specifically for the

China market.”   The proposal begins with a lengthy research and

development phase and does not appear to have drawn on or
                                - 21 -

incorporated any of the specific concepts promoted in the 1994

and 1995 materials.

     Moreover, two of the proposals contained in the record,

those related to the motorcycle-powered vehicle and the sports

car for China, set forth a plan or integrated step labeled

“marketing”.   The activities described thereunder include the

creation of a brand identity encompassing logo, badge, and

official colors; the development of sales and distributions

networks; the preparation of marketing materials such as

brochures, CD/DVDs, and videos; targeted advertising campaigns in

television and print media; introduction of vehicles at

automobile shows; provision of loaner vehicles to driving

schools; and consideration of a motorsports program to build

brand awareness and prestige.    Again, the evidence does not show

that the Shrike Cars vehicle venture ever reached a stage with

respect to any product that included similar comprehensive

efforts that would correlate with these descriptions of a

marketing program.

     The sole item related to the Shrike name that the evidence

could suggest was commercially marketed prior to 1996 was a line

of auto care products.   Petitioners introduced a picture of a

bottle of “Shrike Coach Wash”, and Mr. Weaver testified:    “we

have been selling, since 1996, automotive-care products and

they’ve gone under a variety of names, one of which was Shrick
                               - 22 -

[sic].”   No other documentary evidence elaborated upon these

purported sales or the status of the line in 1998.    Critically,

however, even if the products continued to be sold in 1998,

petitioners apparently did not consider the endeavor connected to

the “Automobile construction” business for which they submitted a

Schedule C, in that no gross receipts were reported.    They also

never alleged that any of the expenditures reported on the

Schedule C derived from these products.    We therefore conclude

that the potential existence at some point of this product line

has little, if any, bearing on whether the Schedule C business

was a going concern in 1998.

     Finally, the exhibits introduced by petitioners also contain

three letters dated from August through November of 1999

regarding potential investment by third parties in Shrike Cars.

These letters make no mention of any specific project and

therefore cannot imply the existence of any definite and focused

ongoing business.

     On this record, the Court can only surmise that Shrike Cars

was at most in the startup phase of any automobile construction

or automobile marketing venture in 1998.    The evidence indicates

that the expenditures reported on petitioners’ Schedule C are

within the pale of section 195 costs, particularly as elucidated

in legislative history.   A significant portion of petitioners’

exhibits relate to proposals soliciting third-party interest, and
                                 - 23 -

the expenses specifically identified on the Schedule C are for

advertising, travel, meals, and entertainment.     The legislative

history references costs for exploring potential markets and

products and “incurred in lining up prospective distributors,

suppliers or customers”.     H. Rept. 96-1278, supra, 1980-2 C.B. at

712.    Advertising and travel expenses are also expressly

highlighted.     Id.   Petitioners have failed to show that the

operations of Shrike Cars in 1998 had advanced beyond such

activities in the nature of exploration or preliminary

solicitation.

            2.   Comparisons to Caselaw

       Both parties cite various cases that they maintain parallel

the factual circumstances at bar.     Petitioners, for instance,

allege similarities to Cabintaxi Corp. v. Commissioner, 63 F.3d

614 (7th Cir. 1995), Blitzer v. Commissioner, 231 Ct. Cl. 236,

684 F.2d 874 (1982), and Lamont v. United States, 80 AFTR 2d 97-

7320, 97-2 USTC par. 50,861 (Fed. Cl. 1997).     Respondent, in

contrast, emphasizes scenarios such as those in McKelvey v.

Commissioner, T.C. Memo. 2002-63, and Reems v. Commissioner, T.C.

Memo. 1994-253.

       Petitioners rely on Cabintaxi Corp. v. Commissioner, supra,

for the proposition that “a business operation commences when the

entity starts to operate toward the goal of selling products”,

without regard to whether the operation is successful in
                                - 24 -

generating revenue.   In Cabintaxi Corp. v. Commissioner, supra at

620, the taxpayer corporation was formed in 1981 for the

expressed purpose of selling, installing, and maintaining

automated transportation systems.    In 1984, the taxpayer entered

into a distributorship with a German company to market in the

United States and Canada the “Cabintaxi” system developed abroad

by the German company.   Id.    Although the taxpayer never obtained

any customers for the system, it sought to deduct expenses in

1984 and 1985 as an ongoing trade or business.      Id. at 618-620.

The Court of Appeals, disagreeing with this Court, held in favor

of the taxpayer.   Id. at 620-621.

     In reversing our decision below, the Court of Appeals noted

that the “Tax Court’s reasoning confuses business activity with

the purpose of the activity.”     Id. at 620.   The Court of Appeals

stated:

     The principal purpose for which Cabintaxi was formed
     was to make money, and to do this it had * * * to
     sell, install, or maintain automated transit systems.
     But before it could sell, install, or maintain its
     first system, it had to sell the system, and to sell it
     had to incur selling expenses. Those expenses were an
     integral part of being in the business of selling
     automated transit systems.   [Id.]

Hence, the crucial fact that the German transportation system was

already developed and commercially available enabled the Court of

Appeals to equate the signing of the U.S. and Canadian

distribution agreement, coupled with prompt commencement of
                              - 25 -

actual sales and marketing activities, with the start of an

active trade or business as a distributor for the Cabintaxi

system.   Id. at 620-621.

     In contrast, petitioners here have failed to prove that

Shrike Cars’ efforts in 1998 ever reached a point where there

existed a commercial product to sell and/or that they were

focused on selling, marketing, or distributing a specific product

or products.   Rather, the Shrike Cars business, as of 1998,

remained in an exploratory stage.   Notably, the taxpayer in

Cabintaxi Corp. v. Commissioner, supra, did not take the

position, and the Court of Appeals for the Seventh Circuit did

not hold, that costs incurred prior to 1984 should be deductible

as expenses of an ongoing business.    After its founding in 1981

and before 1984, the taxpayer “investigated opportunities for

creating and deploying automated transit systems” and “hoped to

form an alliance with an individual who was developing an

automated transportation system.”     Cabintaxi Corp. v.

Commissioner, T.C. Memo. 1994-316, affd. in part, revd. in part

and remanded 63 F.3d 614 (7th Cir. 1995).    The taxpayer

characterized costs incurred during that period as startup and

organizational expenditures, which it capitalized and sought to

amortize beginning in 1984 under sections 195 and 248.      Id.

     Here, Shrike Cars’ activities would appear more akin to

Cabintaxi Corp.’s pre-1984 endeavors, which endeavors were
                             - 26 -

characterized even by Cabintaxi Corp. as startup operations.    In

effect Shrike Cars was searching for a manufacturer who would

play a key role in developing, fabricating, testing, producing,

and selling one of Shrike Cars’ concept vehicles.    But in 1998,

that manufacturer had not been found and a concept vehicle

commercially attractive to a manufacturer had not yet been

identified.

     Lamont v. United States, supra, and Blitzer v. United

States, supra, are similarly distinguishable.   As in the

Cabintaxi Corp. situation, the entities in both of those cases

had committed to a specific product or project and taken

substantial and formal steps with respect thereto.   The

corporation in Lamont v. United States, 80 AFTR 2d at 97-7321 to

97-7322, 97-2 USTC at 90,423-90,424, had been formed to develop

language translation software, received a copyright on its system

in February of the year in issue, had programmers and third-party

consultants actively working to revise the system throughout that

year, and even made an unsolicited sale of the system before

yearend.

     Blitzer v. United States, 684 F.2d at 877-878, involved a

partnership formed to develop and operate a subsidized housing

project through a program administered by the U.S. Department of

Housing and Urban Development (HUD).   Although initial steps in

the project were taken during 1971, the court found the critical
                              - 27 -

date for commencement of a trade or business, within the meaning

of section 162, to be October 23, 1973, when closing on the

project took place and the formal regulatory agreement between

the partnership and HUD was executed.    Id. at 877-881, 895.    The

court noted that by this date “the partnership had acquired the

land, had arranged for financing of the project, had executed its

building loan agreement and given a note therefor, had received

substantial funds, and had prepared plans for actual construction

of its apartments (which began shortly thereafter).”    Id. at 880.

     The necessity for a comparable commitment to a particular

and focused project is highlighted by contrast with cases cited

by respondent.   In McKelvey v. Commissioner, T.C. Memo. 2002-63,

for instance, the taxpayer conducted a prepurchase economic and

market feasibility study on a parcel of forestland, purchased the

land with the intent to start a tree-farming business, engaged a

third-party professional to prepare a forest management plan, and

conducted an unsuccessful test pilot planting.    However, the

taxpayer by the end of the period in issue “had not decided which

species of trees to plant and had not harvested any of the

existing trees on his property”.   Id.   The Court held that any

expenditures were fairly characterized as startup expenses.      Id.

     Likewise, Reems v. Commissioner, T.C. Memo. 1994-253,

involved a venture to raise and harvest timber.    During the year

in issue, taxpayer acquired the property and engaged a woodsman
                               - 28 -

who cleared and prepared logging roads on the premises.     Id.   The

taxpayer also made incidental sales of two walnut trees to the

woodsman and of firewood generated from the clearing activities.

Id.    Nevertheless, observing that the taxpayer had not acquired

an already functioning business and citing Richmond Television

Corp. v. United States, 345 F.2d at 907, this Court found a new

business had not yet begun.    Reems v. Commissioner, supra.

Therefore, section 195 applied on grounds that the endeavor

constituted a startup within the meaning of that statute.      Id.

       Again, the record here does not reveal that Shrike Cars’

activities in 1998 had progressed beyond preparatory steps such

as those identified in McKelvey v. Commissioner, supra, and Reems

v. Commissioner, supra, or had risen to the level of formal

commitment with material efforts toward a specific project as was

shown by the taxpayers in Cabintaxi Corp. v. Commissioner, 63

F.3d 614 (7th Cir. 1995), Blitzer v. Commissioner, 231 Ct. Cl.

236, 684 F.2d 874 (1982), and Lamont v. United States, 80 AFTR 2d

97-7320, 97-2 USTC par. 50,861 (Fed. Cl. 1997).    The Court holds

that the costs claimed on petitioners’ Schedule C for Shrike Cars

are startup expenditures falling within the purview of section

195.    Accordingly, petitioners must capitalize such costs to the

extent substantiated and are not entitled to reduce their 1998

gross income by the claimed loss of $448,120 derived from Shrike

Cars.
                                - 29 -

III.   Section 6651(a)(1) Addition to Tax

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

delinquency in filing returns and provides in relevant part as

follows:

       SEC. 6651.   FAILURE TO FILE TAX RETURN OR TO PAY TAX.

            (a) Addition to the Tax.--In case of failure--

                 (1) to file any return required under
            authority of subchapter A of chapter 61 * * * , on
            the date prescribed therefor (determined with
            regard to any extension of time for filing),
            unless it is shown that such failure is due to
            reasonable cause and not due to willful neglect,
            there shall be added to the amount required to be
            shown as tax on such return 5 percent of the
            amount of such tax if the failure is for not more
            than 1 month, with an additional 5 percent for
            each additional month or fraction thereof during
            which such failure continues, not exceeding 25
            percent in the aggregate;

       The Supreme Court has characterized the foregoing section as

imposing a civil penalty to ensure timely filing of tax returns

and as placing on the taxpayer “the heavy burden of proving both

(1) that the failure did not result from ‘willful neglect,’ and

(2) that the failure was ‘due to reasonable cause’”, in order to

escape the penalty.     United States v. Boyle, 469 U.S. 241, 245

(1985).    “Willful neglect” denotes “a conscious, intentional

failure or reckless indifference.”       Id.   “Reasonable cause”

correlates to “ordinary business care and prudence”.        Id. at 246

& n.4; sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
                              - 30 -

     As previously indicated, section 7491(c) places the burden

of production on the Commissioner.     Here, respondent’s burden is

satisfied by the stipulation of the parties that petitioners’

1998 return was filed on January 7, 2000.    This date is well over

the 5 months necessary to impose the maximum penalty.    Since

petitioners have offered no explanation for the untimeliness,

either at trial or on brief, they have failed to establish any

reasonable cause.   We therefore hold that petitioners are liable

for the section 6651(a)(1) delinquency addition to tax at the 25

percent rate.

     To reflect the foregoing and concessions made,


                                           Decision will be entered

                                     for respondent.
