                  T.C. Summary Opinion 2001-38



                     UNITED STATES TAX COURT



     JEFFERRY PHUONG VO AND MAI XUAN NGUYEN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 3555-99S.                      Filed March 26, 2001.


    Jefferry Phuong Vo and Mai Xuan Nguyen, pro sese.

    Robert V. Boeshaar, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year in issue.    The decision to be

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

should not be cited as authority.

     Respondent determined a deficiency of $5,726 in petitioners’
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1995 Federal income tax and an accuracy-related penalty under

section 6662 of $1,145 for taxable year 1995.

     The issues for decision are:   (1) Whether petitioners were

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

of income during the year in issue; (2) if so, whether

petitioners’ claimed expenses are ordinary and necessary; and (3)

whether petitioners are liable for negligence penalties pursuant

to section 6662.

                           Background

     The stipulation of facts and the accompanying exhibits are

incorporated herein by reference.   Petitioners resided in

Portland, Oregon, at the time the petition in this case was

filed.

     Petitioners were husband and wife in 1995 and filed a joint

Federal income tax return for the taxable year.   Petitioner

Jefferry Phuong Vo (petitioner), along with two friends, formed a

partnership and designed a system in 1992 to use solar energy to

generate electricity to run household appliances.   They rented a

three bedroom residential property located at 1770 Caloosa Court,

San Jose, California (San Jose property), in which to develop and

apply the solar-powered electric generator (generator).

Petitioners claim that they needed a large unobstructed yard with

sufficient sunlight to meet their solar needs and that the

residential property was less expensive than a commercial
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property.   None of the partners lived in the San Jose property.

All three had their own personal residences.

     The partners began marketing the generator in 1993, and they

continued to use the San Jose property for office space and to

demonstrate the generator for potential distributors.   They used

a room in the San Jose property as a demonstration area to

display the generator’s capacity to run a television, fan, and

several lights.    Petitioner explained that the generator was not

designed to supply sufficient energy to run a typical household

in the United States but that it was designed to meet the more

limited energy needs of households in developing countries.

     In 1994 the partners sent a generator to one of the

partner’s relatives in Vietnam who unsuccessfully attempted to

sell the system in Vietnam at a price of $2,000.   The relative

decided to keep the generator for himself, and the partners gave

it to him at their cost of $300.

     After further unsuccessful attempts at establishing

distributors in Vietnam, petitioner bought out his partners’

interests for $1,000 on May 30, 1994, and began marketing the

generator under the name Solarsys Technology (Solarsys).

Petitioners continued to use the San Jose property and began

looking for distributors in other countries such as Malaysia and

the Philippines.   In 1995 approximately 12 people expressed an

interest in establishing distributorships in their countries, and
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five people gave petitioners $1,500 or $2,000 for generators to

take to their countries to determine if there was a market for

the system.   All five returned the generators for a refund after

determining that they were too expensive to sell.

     Petitioner continued making improvements to the system and

attempting to establish distributors.    In 1996 petitioners sold a

generator for $1,500 for the personal use of one of the people

who had agreed to sell the generators in Vietnam.

     Petitioners filed a joint Form 1040, U.S. Individual Income

Tax Return, for 1995 and Schedule C, Profit or Loss From

Business, for their activity with respect to Solarsys.

Respondent issued a notice of deficiency for petitioners’ 1995

taxable year disallowing deductions for all the Schedule C

expenses on the grounds that petitioners were not engaged in a

trade or business or activity for profit and determining that if

petitioners were engaged in such activity, the claimed expenses

are not ordinary and necessary.    The expenses at issue are as

follows:

           Advertising                     $94
           Car & truck expenses            256
           Depreciation                  1,600
           Office expenses                 103
           Rent                         12,600
           Travel                        1,875
           Meals & entertainment           100
           Utilities                     3,095
           Other                           724

              Total                     20,447
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                            Discussion

     Deductions are allowed under section 162 for the ordinary

and necessary expenses of carrying on an activity which

constitutes the taxpayer's trade or business.   Deductions are

allowed under section 212 for expenses paid or incurred in

connection with an activity engaged in for the production or

collection of income, or for the management, conservation, or

maintenance of property held for the production of income.

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

section 162, “the taxpayer must be involved in the activity with

continuity and regularity” and “the taxpayer's primary purpose

for engaging in the activity must be for income or profit.”

Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).   In

addition, the taxpayer’s business operations must actually have

commenced.   See Thomason v. Commissioner, T.C. Memo. 1997-480;

Scagliotta v. Commissioner, T.C. Memo. 1996-498; McManus v.

Commissioner, T.C. Memo. 1987-457, affd. per curiam without

published opinion 865 F.2d 255 (4th Cir. 1988).   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 Commissioner v. Groetzinger, supra at 36.

     It is unclear on what basis respondent determined that

petitioners’ activity with respect to Solarsys did not constitute

a business in 1995.   Upon consideration of all the evidence in
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the record, however, we are satisfied that petitioners were

actively engaged in business in 1995 under the name Solarsys with

the primary purpose of making a profit.

     Petitioners’ activity attempting to establish distributors

to sell their generators was conducted with regularity and

continuity.   Their activity went beyond the mere startup phase.

In 1995 the generator was available for sale, and five

individuals purchased the generator for resale.   The fact that

these individuals eventually returned the generators for a refund

does not undermine a conclusion that petitioners were engaged in

business.   Further, nothing in the record suggests that

petitioners’ activity attempting to develop a market for their

generators was not undertaken with the primary purpose of making

a profit.   See Golanty v. Commissioner, 72 T.C. 411, 426 (1979),

affd. without published opinion 647 F.2d 170 (9th Cir. 1981);

sec. 1.183-2(a) and (b), Income Tax Regs.

     The next consideration is whether the expenses petitioners

claimed on their Schedule C are ordinary and necessary business

expenses.   See sec. 162(a); Commissioner v. Lincoln Sav. & Loan

Association, 403 U.S. 345, 352 (1971); Welch v. Helvering, 290

U.S. 111, 113 (1933).   “Ordinary” has been defined in the context

of section 162(a) as that which is “normal, usual, or customary”

in the taxpayer's trade or business.   Deputy v. du Pont, 308 U.S.

488, 495 (1940).   “Necessary” has been construed to mean
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“appropriate” or “helpful” in the development of the taxpayer's

business.    Welch v. Helvering, supra.    Unless expressly provided

for, section 262 prohibits deductions for personal, living, or

family expenses.

     The basis of respondent’s determination that the expenses at

issue are not ordinary and necessary appears to be that the

expenses were personal in nature and not related to petitioner’s

business of selling generators.      Based on petitioner’s

explanations at trial, we are satisfied that the following

expenses are ordinary and necessary expenses incurred in

petitioners’ business:

            Advertising                       $94
            Car & truck expenses              256
            Depreciation                    1,600
            Office expenses                   103
            Rent                           12,600
            Utilities                       2,755
            Other                             724

               Total                       18,132

     We found credible petitioner’s testimony that the San Jose

property was used for business purposes and not as their personal

residence despite the fact that petitioners rented the property

under a residential lease that provides that the property is to

be “used only as a private residence”.      With respect to the

expenses related to petitioners’ truck (depreciation, car &

truck, and $524 of “other” expense), petitioner testified that he

and his wife used the truck to transport solar panels, to
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transport the generator system, and to travel to different

locations to distribute brochures about their business.

Respondent did not challenge petitioners’ substantiation of these

expenses, and nothing in the record contradicts petitioner’s

testimony.

     We find that petitioners are not entitled to deductions for

$340 of utility expenses.   These expenses were incurred for cable

television.   Petitioner testified that the cable was necessary

because he liked to watch the news.     These expenses are personal

and not attributable to petitioners’ business.    We also find that

petitioners are not entitled to deductions for travel and meal

and entertainment expenses as petitioners have provided no

evidence that these expenses were related to their business.

     Finally, we address the accuracy-related penalty imposed

pursuant to section 6662(a).    Section 6662(a) and (b)(1) imposes

a penalty on any portion of an underpayment that is attributable

to negligence or disregard of rules or regulations.    The term

“negligence” includes any failure to make a reasonable attempt to

comply with the statute, and the term “disregard” includes any

careless, reckless, or intentional disregard.    Sec. 6662(c).    The

penalty does not apply to any portion of an underpayment for

which there was reasonable cause and with respect to which the

taxpayer acted in good faith.   See sec. 6664(c).

     Petitioners bear the burden of proving that the accuracy-
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related penalty is inapplicable.1   See Rule 142(a); Welch v.

Helvering, supra at 115; Bixby v. Commissioner, 58 T.C. 757, 791-

792 (1972).

     With respect to the cable charges, petitioners claimed

business deductions for expenses which were personal in nature.

Petitioners have failed to provide any information about the

business purpose of their claimed travel and meal and

entertainment expenses.

     Accordingly, we hold that petitioners are liable for an

accuracy-related penalty pursuant to section 6662(a) with respect

to the understatement of tax attributable to the deductions we

have disallowed.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                         Decision will be entered

                                    under Rule 155.




     1
        Section 7491(c), applicable to court proceedings arising
in connection with examinations commencing after July 22, 1998,
requires the Secretary to carry the burden of production with
respect to additions to tax. See Internal Revenue Service
Restructuring & Reform Act of 1998, Pub. L. 105-206, sec. 3001,
112 Stat. 726. Petitioners do not contend that their examination
commenced after July 22, 1998, or that sec. 7491 is applicable to
them.
