                        T.C. Memo. 2002-63



                      UNITED STATES TAX COURT



                ROBERT E. MCKELVEY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1971-00.                 Filed March 5, 2002.


     Robert E. McKelvey, pro se.

     Daniel J. Parent, for respondent.



                        MEMORANDUM OPINION


     BEGHE, Judge:   This case is before the Court under Rule 1211

on petitioner’s motion for summary judgment and respondent’s

cross-motion for summary judgment.



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

     Respondent determined deficiencies in petitioner’s Federal

income tax of $3,034 for 1995 and $6,015 for 1996.   After

concessions, the issues presented for decision by the parties’

motions are:   (1) Whether petitioner’s expenditures related to

his tree farm activities are startup expenses that are not

currently deductible under section 195; and (2) if the expenses

are not startup expenses, whether petitioner was engaged in an

activity for profit within the meaning of section 183.2

     We sustain respondent’s determination that petitioner’s

“trees” expenses were startup expenses and not currently

deductible.    In so doing, we shall grant respondent’s motion and

deny petitioner’s motion.   As a result, we do not reach the

section 183 issue raised by respondent.

Background

     Petitioner resided in Whitmore, California, when the

petition was filed in this case.

     Petitioner timely filed a petition and amended petition,

both of which contained various frivolous arguments.   After

respondent filed a motion to dismiss for failure to state a



     2
      Respondent also determined in the notice of deficiency that
petitioner failed to include taxable Social Security income in
1995 and 1996, unemployment compensation in 1995, and interest
income paid in 1996. Respondent also disallowed certain
miscellaneous itemized deductions in 1995 and a net operating
loss in 1996. Petitioner did not challenge any of these
determinations in any of his petitions. Pursuant to Rule 34(b),
these issues are deemed conceded.
                                - 3 -

claim, the Court granted petitioner leave to file a second

amended petition in which he was to set forth the specific error

or errors in respondent’s determinations and the facts upon which

petitioner bases each assignment of error.

     On June 13, 2000, petitioner filed a second amended

petition.    In the second amended petition, petitioner’s only

assignment of error is that he is in the business of tree farming

on the parcel of land he purchased in 1994, and that he should be

allowed to deduct expenses incurred in connection with his tree-

farm activity.

Background

     Petitioner worked for the California Department of Forestry

(CDF) for 25 years as an analyst, specializing in fire prevention

and wildfire studies.    Sometime prior to August 1994, petitioner

conducted a “prepurchase economic and market feasibility study”

on a 39.2-acre parcel of forestland near Whitmore, California.

Petitioner conducted the study for the purpose of ascertaining

the commercial viability of the land.    In addition, prior to

August 1994, the CDF made several visits to the property to

survey the existing and prospective forest health and related

entomology, pest control, and wildfire hazard and risk control

issues.   In August 1994, petitioner purchased the 39.2-acre

parcel with the intent to start a tree-farming business.    The
                                - 4 -

property includes a barn and a cabin that petitioner uses as his

personal residence.

      In October 1995, petitioner engaged Robert G. Rynearson to

prepare a forest management plan (FMP) for his property.    The

cost of the FMP was $1,800.    The FMP states that petitioner’s

objectives are to improve the property’s long-term timber

production, as well as to enhance the wildlife, recreational, and

aesthetic values potential of the property.    To attain these

objectives, the FMP cites the need to improve growing conditions.

According to the FMP, a 1988 fire left much of the property

“occupied by live brush interlaced with standing and down fire

killed brush and trees.”   These conditions impede successful

growth and are a continuing fire hazard.    The report concludes

that the property is in a good location with respect to possible

timber and fuelwood markets.

     At some time after October 1995, petitioner conducted a

“pilot test” planting of 51 Coulter pine trees.    According to

petitioner, the pilot planting was unsuccessful because his land

could not support commercial Coulter pine trees.    By the end of

1996, petitioner had not decided which species of trees to plant

and had not harvested any of the existing trees on his property.

     As of March 2001, petitioner had not commercially harvested

any trees, had not planted any new trees, and had not decided

which species of trees to plant.    Petitioner is still considering
                                - 5 -

which species of trees to plant on his property and continuing

his efforts to prepare the property for use as a tree farm.    He

is conducting wildfire damage reversal and soil conservation

measures and has built a road on the property to a previously

inaccessible area.

     On his 1995 Federal income tax return, petitioner included a

Schedule F, Profit or Loss From Farming, and claimed the

following deductions related to the activity petitioner

identified as “trees”:

          Depreciation                    $781
          Repairs/maintenance            2,302
          Taxes                            771
          Accounting                       235
          Pest control                   7,427
          Survey study                   1,800
          Tools                          5,045
          Travel                           226
            Total                       18,587
     On his 1996 Federal income tax return, petitioner claimed

the following deductions on Schedule F for the activity he again

described as “trees”:

          Depreciation                  $1,339
          Car and truck expenses         1,189
          Mortgage interest                 67
          Repairs/maintenance            4,473
          Accounting                     1,387
          Books & subs                   1,246
          Pest control                   9,189
          Tools                          2,137
            Total                       21,027
                               - 6 -

     Respondent determined that the expenses petitioner claimed

on his Schedule F for 1995 and 1996 were start-up expenses under

section 195 and not currently deductible.    In the alternative,

respondent determined that petitioner’s “trees” activity was not

an activity engaged in for profit under section 183.

Discussion

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.     Fla. Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).    Summary judgment is

appropriate where there is no genuine issue of material fact and

decision may be rendered as a matter of law.    Rule 121(b);

Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.

17 F.3d 965 (7th Cir. 1994); Jacklin v. Commissioner, 79 T.C.

340, 344 (1982).   In deciding whether to grant summary judgment,

the Court must consider the factual materials and the inferences

to be drawn from them in the light most favorable to the

nonmoving party.   Bond v. Commissioner, 100 T.C. 32, 36 (1993).

     In order to view the factual materials and inferences in the

light most favorable to petitioner, all facts set forth in the

Background portion of this opinion have been taken from

petitioner’s second amended petition and motion papers and are

assumed to be true for the purpose of deciding respondent’s

motion for summary judgment.   Sundstrand Corp. v. Commissioner,

supra.
                                - 7 -

     Respondent contends that petitioner neither engaged in a

trade or business within the meaning of section 162(a), nor an

active trade or business within the meaning of section 195(c),

during either of the years in issue.    According to respondent,

any expenditures relating to petitioner’s “trees” activity are

nondeductible start-up expenses under section 195(a).

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

expenses of carrying on a trade or business.    In order for the

expenses to be deductible under section 162, the expenses must

relate to a trade or business functioning at the time the

expenses were incurred.    Hardy v. Commissioner, 93 T.C. 684, 686

(1989).    A taxpayer 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).

“Carrying on a trade or business” requires a showing of more than

initial research into or investigation of business potential.

Dean v. Commissioner, 56 T.C. 895, 902 (1971).    The business

operations must have actually commenced.

     Petitioner was not “carrying on a trade or business” in 1995

or 1996.   In neither of the years at issue did petitioner

commercially harvest any trees or even decide which species of

tree to plant.   Petitioner did conduct a pilot planting of

Coulter pine trees, but the only purpose of the planting was to
                                - 8 -

determine whether his property could sustain commercial Coulter

pines.    As of March 2001, petitioner still had not harvested any

trees, had not planted any new trees, and had not yet decided

which species of trees to plant so that he could begin his tree

farming business.    Petitioner had not actually commenced the

business activity of tree farming in either of the years at

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

Accordingly, petitioner’s “trees” activities on the property he

purchased in 1994 were not a functioning business during 1995 and

1996.    Any expenses incurred by petitioner were in connection

with the research into and investigation of the business

potential of creating a tree farm; petitioner’s expenses are

fairly characterized as nondeductible start-up expenditures.       Id.

     Section 195(a) provides that no deduction shall be allowed

for start-up expenditures.    Section 195(c)(1) defines start-up

expenditures as, among other things, any amount paid in

connection with creating an active trade or business, which, if

paid or incurred in connection with the operation of an existing

active trade or business, would be allowable as a deduction for

the taxable year in which paid or incurred.3


     3
      We note that petitioner claimed a $771 deduction for taxes
on the Schedule F attached to his 1995 return, and a $67
deduction for mortgage interest on his 1996 Schedule F. Amounts
for which a deduction is allowed under sec. 163(a) and sec. 164
are not start-up expenditures. Sec. 195(c)(1). Similarly, sec.
263A does not prevent petitioner from taking a current deduction
for property taxes or mortgage interest. Sec. 263A(c)(5).
Respondent did not question whether the deductions claimed for
                                                   (continued...)
                                 - 9 -

         Petitioner’s approach to the acquisition of the property

was apparently carefully considered and focused on creating a

tree farm.     Petitioner worked for the CDF for 25 years as an

analyst; much of his experience seems relevant to the development

and operation of a tree farm.     Petitioner conducted a

“prepurchase economic feasibility study” which showed the

property to be commercially viable.      In reliance on the results

of the study, petitioner purchased the property.     Petitioner

consulted with an expert on how to maximize the property’s

usefulness and had the FMP prepared.     Petitioner conducted an

unsuccessful pilot planting to ascertain whether his property

could commercially support Coulter pines.

     The foregoing facts, viewed in the light most favorable to

petitioner, clearly show that petitioner was, and apparently

still is, investigating the feasibility of creating a tree farm

on his property.     Any expenses he has incurred in this regard are

start-up expenses for which no current deduction is allowed.4       As

a result, we shall grant respondent’s motion, which requires that

we deny petitioner’s motion.




     3
      (...continued)
mortgage interest and taxes were allowable under secs. 163(a) and
164. We direct the parties to address, in the Rule 155
computation, the proper tax treatment of these items.
     4
      Start-up expenses are deferred expenses which, at the
election of the taxpayer, may be amortized over the 60-month
period beginning in the month in which the active trade or
business begins. Sec. 195(b)(1), (c).
                        - 10 -

To reflect the foregoing,



                                  An Order will be issued

                             granting respondent’s motion

                             for summary judgment and

                             denying petitioner’s motion

                             for summary judgment, and

                             decision will be entered under

                             Rule 155.
