                  T.C. Summary Opinion 2001-164



                     UNITED STATES TAX COURT



VANCE ORPHEUS BRIGHT, JR. AND MARY FRANCES BRIGHT, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 14106-99S.                 Filed October 16, 2001.


     Vance Orpheus Bright, Jr. and Mary Frances Bright, pro se.

     Veena Luthra, for respondent.


     POWELL, Special Trial Judge:    This case was heard pursuant

to the provisions of section 74631 of the Internal Revenue Code

in effect at the time the petition was filed.   The decision to be

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

should not be cited as authority.




1
   Unless otherwise indicated, subsequent section references are
to the Internal Revenue Code in effect for the years in issue,
and Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 2 -

     Respondent determined deficiencies of $1,905 and $2,791 in

petitioners’ 1996 and 1997 Federal income taxes, respectively.

After a concession by respondent,2 the issue is whether

petitioners are entitled to deduct certain business expenses on

their 1996 Federal income tax return.     Petitioners resided in

Palmyra, Virginia, when the petition was filed.

                             Background

     The facts may be summarized as follows.     In 1986,

petitioners purchased a house in Cumberland, Virginia (the

Cumberland house).   They rented the property from the time of its

purchase until December 1995.   In January 1996, the Cumberland

house was listed for sale.   The Cumberland house remained on the

market for sale until August 1996, at which time petitioners

moved in and it then became their primary residence.     Petitioners

resided at the Cumberland house until April 1997.

     Prior to converting the Cumberland house into their primary

residence, petitioners owned and resided in a house in Falls

Church, Virginia (the Falls Church house).     The sale of the Falls

Church house in August 1996, precipitated their move to the

Cumberland house.    A gain of $162,215 from the sale of the Falls

Church house was rolled over into a new residence that was under

construction in Fluvanna County, Virginia (the Palmyra house).



2
   Respondent concedes that there is no deficiency due from
petitioners for the 1997 taxable year.
                               - 3 -

See sec. 1034, repealed by sec. 312(b), Taxpayer Relief Act of

1997, Pub. L. 105-34, 111 Stat 839, effective May 6, 1997.

Petitioners moved to the Palmyra house once it was completed in

April 1997.

     The Cumberland house was put back on the market for sale in

April 1997, and was sold in August 1997.   Respondent concedes

that the gain from the sale of the Cumberland house was properly

excluded from petitioners’ gross income for 1997 pursuant to

section 121.   See sec. 121, enacted by sec. 312(a), Taxpayer

Relief Act of 1997, Pub. L. 105-34, 111 Stat. 836 (amended by

sec. 6005(e), Internal Revenue Service Restructuring and Reform

Act of 1998, Pub. L. 105-206, 112 Stat. 805).

     Additionally, petitioners purchased an unimproved lot in

Cumberland County in 1980 which they sold in 1997.   They reported

a capital gain of $1,597 on their 1997 Federal income tax return.

In 1995, petitioners purchased an unimproved lot in Fluvanna

County for $30,000.   They sold the property during that year for

$30,000 and reported the transaction on Schedule C, Profit or

Loss From Business.

     On Schedule C of petitioners’ 1996 Federal income tax

return, petitioners deducted the following expenses relating to

the Cumberland house prior to that property’s becoming their

primary residence:
                                 - 4 -

     Car and truck expenses                 $5,220.16
     Depreciation                            3,639.50
     Insurance                                 579.10
     Meals and entertainment                   210.00
     Business use of the Falls
       Church house                          1,410.90
     Supplies                                   98.14
     Maintenance                               675.23
     Loss                                  $11,833.03

Petitioners reported no income on the 1996 Schedule C.

Respondent disallowed the $11,833.03 loss relating to the

Cumberland house.

                              Discussion

     Before we explore petitioners’ argument, as we understand

it, it is helpful to delineate exactly what is at issue here.

Petitioners do not contend that during 1996 the rental activity

of the Cumberland house constituted a trade or business of rental

property under section 162.    This is understandable because at

the end of 1995 petitioners had abandoned any rental activity and

were attempting to sell the Cumberland house.     There was simply

no nexus between their previous rental activity and the expenses

that were incurred during 1996.    Rather, petitioners contend that

they were engaged in a trade or business that, in their own

words, consisted of the “purchase, development, physical

improvement, building construction, maintenance, and sale of real

properties including the necessary planning and management these

activities entailed.”
                                - 5 -

     In pertinent part, section 162(a) provides that “There shall

be allowed as a deduction all the ordinary and necessary expenses

paid or incurred during the taxable year in carrying on any trade

or business”.   The question is whether petitioners’ activities

that gave rise to the disputed deductions constituted a trade or

business during 1996.

     In one sense petitioners’ argument here is unusual.

Generally, a taxpayer seeks to avoid his or her real estate

activity’s being classified as a trade or business in order to

claim the benefit of lower capital gains rates on the sale or

disposition of real property.   See, e.g., Thompson v.

Commissioner, 322 F.2d 122 (5th Cir. 1963).   Here, petitioners

claim that their real estate activities constituted a trade or

business.   The considerations in deciding whether a taxpayer’s

activities are a trade or business are well defined.     In Polakis

v. Commissioner, 91 T.C. 660, 669-670 (1988), we stated:

          Determining whether a taxpayer’s activities rise to a
     level which constitutes “‘carrying on a business’ requires
     an examination of the facts in each case.” * * * Among the
     tests that courts have come to rely on in divining the
     nature of the taxpayer’s activities with respect to real
     estate are the following: the nature and purpose of the
     acquisition of the property and the duration of the
     ownership; the continuity of 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
     taxpayer’s income. [Citations omitted.]
                               - 6 -

See also United States v. Winthrop, 417 F.2d 905, 910 (5th Cir.

1969); Hoover v. Commissioner, 32 T.C. 618, 625 (1959); Dressen

v. Commissioner, 17 T.C. 1443, 1447 (1952); Thrift v.

Commissioner, 15 T.C. 366, 369 (1950); McCullen v. Commissioner,

T.C. Memo. 1997-280.

     Petitioners argue that their purchase and sale of the

Cumberland house and the unimproved lot in Cumberland County,

together with the sale of the Fluvanna County unimproved lot

constituted a trade or business of buying, improving, and selling

property.   The Cumberland County unimproved lot was held for 16

years, and as far as the record shows there were no extensive

improvements made to the property.     Furthermore, we note that

petitioners treated that property as a capital asset on their tax

return when the property was sold rather than property being held

for sale in a trade or business.   While petitioners appear to

have bought and sold the Fluvanna County unimproved lot in 1995,

and there were alleged but undefined improvements made, there was

no gain or loss on the transaction.     We give that transaction

little weight.   The only other transaction was the sale of the

Cumberland house that was held for rental income for 9 years.

Furthermore, except for the rental income, petitioners derived

little income from the alleged business activity.     These property

transactions are typical of investments rather than a trade or

business of developing property.   In short, we do not find that
                                - 7 -

petitioners were engaged in the trade or business of buying,

developing, and selling real estate during 1996, or that the

Cumberland house was held in the ordinary course of such a trade

or business.

     Finally, the argument may be suggested that the deductions

should be allowable under section 212(1).     That section allows a

deduction for, inter alia, ordinary and necessary expenses paid

“for the production or collection of income”.     When one analyzes

the situation here, however, it becomes apparent that these

expenses were costs associated with the sale of the Cumberland

house and not for the production or collection of income.     We are

concerned here with the origin and character of the expenses for

which the deductions were claimed.      See United States v. Gilmore,

372 U.S. 39 (1963).    As we have already noted, any rental

activity had been abandoned, and petitioners were not in a trade

or business of developing the property for sale.     Petitioners

held the property for sale.    If petitioners had not moved into

the Cumberland house and it had remained on the market until

sold, those expenses, if deductible at all,3 would have been

considered as expenses of the sale.     See Cramer v. Commissioner,

55 T.C. 1125, 1132 (1971); see also Hadley Falls Trust Co. v.



3
   For   example, of the depreciation claimed, $850.50 was for
office   equipment. The balance ($2,789) is not explained. We are
unsure   how the depreciation was an ordinary and necessary expense
of the   sale of the property.
                              - 8 -

United States, 110 F.2d 887 (1st Cir. 1940).    While their goal

was to receive income from the sale, as we held in Gunn v.

Commissioner, 49 T.C. 38, 56 (1967):

     the word “income” in section 212(1) “is not to be given a
     wholly literal reading. If a taxpayer sells * * * capital
     assets, section 212(1) does not permit him to deduct
     expenses of sale even though the sale produces a gain which
     constitutes ‘gross income’,” See Spangler v. Commissioner,
     323 F.2d 913, 921 (C.A. 9, 1963), where the court noted that
     “Costs connected with the disposition of a capital asset are
     also capital expenditures to be added to the taxpayer’s
     basis, or offset against the sales price, rather than
     expenses deductible from ordinary income.” * * *

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                           Decision will be entered

                                      under Rule 155.
