                            T.C. Summary Opinion 2018-17



                           UNITED STATES TAX COURT



              SHANE HAVENER AND AMY E. COSTA, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 4506-16S.                            Filed April 4, 2018.



      Shane Havener and Amy E. Costa, pro sese.

      Patrick F. Gallagher, for respondent.



                                SUMMARY OPINION


      PANUTHOS, Special Trial Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect when the

petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not


      1
          Unless otherwise indicated, subsequent section references are to the
                                                                        (continued...)
                                         -2-

reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      In a notice of deficiency dated January 26, 2016, respondent determined a

deficiency of $9,565 in petitioners’ 2013 Federal income tax and a section 6662(a)

accuracy-related penalty of $1,913.

      After concessions,2 the issue for decision is whether petitioners are entitled

to deduct mileage and travel expenses related to Mr. Havener’s activity

remodeling a house.

                                      Background

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

facts and the accompanying exhibits are incorporated herein by this reference.

Petitioners resided in Massachusetts when the petition was timely filed.




      1
       (...continued)
Internal Revenue Code (Code) in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure. We round
monetary amounts to the nearest dollar.
      2
       Respondent conceded the sec. 6662(a) accuracy-related penalty.
Petitioners conceded that (1) they are not entitled to deduct “other” expenses of
$6,311 on their Schedule C, Profit or Loss From Business, and (2) they overstated
the mileage claimed on their Schedule C, as we will discuss in further detail infra
note 4. Respondent concedes that substantiation is not in issue.
                                         -3-

      Mr. Havener (sometimes hereinafter petitioner) worked in a number of

positions, including computer consultant, school teacher, and operator of an auto

repair painting business, before retiring sometime around 2007. Petitioner grew

restless in his retirement and sought a project that could occupy his time. In late

2011 or 2012 petitioners purchased a house in Salem, New York (Salem house),

for $30,000 with the intent that Mr. Havener would remodel it and sell it for a

profit. The Salem house is approximately 250 miles from petitioners’ residence in

Pembroke, Massachusetts (Pembroke residence).

      At the time of purchase the Salem house was “uninhabitable” and required

extensive repairs, including installing a well, repairing or replacing the collapsed

septic tank, adding central heat, replacing windows, adding insulation, and

upgrading electrical wiring. Petitioner, a “handyman at heart”, performed most of

the work himself, with the exception of outsourcing a few tasks such as installing

a well and hiring “a kid to hold the other end of the board” on occasion. Petitioner

also built a front porch and landscaped the yard. Petitioners paid for all supplies

and labor with personal funds.

      During 2013 petitioner traveled to and worked on the Salem house during

the workweek. Trips to the Salem house generally lasted between three and five

days. Petitioner would return to the Pembroke residence on weekends. During
                                          -4-

2013 Ms. Costa worked as a sales manager, and petitioner scheduled his trips to

the Salem house to accommodate her work schedule.3 Petitioner was not

employed during 2013, nor did he work on any activities other than remodeling

the Salem house. It does not appear that Ms. Costa spent any time working on the

Salem house.

      Petitioner owned three vehicles, a 2012 Dodge Grand Caravan (Caravan), a

2011 Dodge Ram 1500 (Ram), and a BMW motorcycle. Petitioner sometimes

drove to the Salem house, in the Caravan or the Ram, making 42 round trips and

driving a total of 25,145 miles in 2013. Petitioner also drove 41 miles to have the

Ram inspected in 2013. Petitioner kept the BMW motorcycle at the Salem house

and he often drove it to local hardware and other stores to purchase supplies

and/or tools, driving a total of 2,073 miles for such trips in 2013.

      Petitioner maintained mileage logs for his three vehicles, recording miles

relating to the Salem house remodeling activity. He also kept copies of toll

receipts for an E-Z pass transponder used to drive on the toll roads between the

Salem house and the Pembroke residence and service invoices for the Ram and the

Caravan.


      3
       Petitioner testified that he came home to take care of the family dog. While
not entirely clear, it appears that Ms. Costa may have worked on the weekends.
                                        -5-

       Petitioner also owned a Piper Warrior airplane. As an alternative to driving

he would occasionally fly his airplane for his weekly trips to the Salem house.

Petitioner drove to an airport near the Pembroke residence, flew to an airport near

the Salem house, and then drove to the Salem house. In 2013 petitioner drove a

total of 71 miles between the Pembroke residence and a nearby airport and the

Salem house and a nearby airport and expended $2,566 to operate his airplane for

these trips.

       Petitioners timely filed a 2013 Form 1040, U.S. Individual Income Tax

Return. Petitioners reported Ms. Costa’s taxable wage or salary income of

$236,679 and Mr. Havener’s taxable distributions from an individual retirement

account and pension totaling $67,912 and taxable Social Security benefits of

$11,271. The sole activity reported on the attached Schedule C was the Salem

house remodeling activity under the name Shane Enterprises. Petitioners reported

zero gross receipts and claimed expense deductions totaling $39,520, including

$2,566 for “travel” expenses and $18,453 for “car and truck” expenses.

Petitioners reported 19,580 miles driven in the Caravan and 12,638 miles driven in

the Ram, a total of 32,218 miles relating to the Salem house activity, and

calculated the car and truck expenses using the standard business mileage rate for
                                          -6-

2013.4 The $39,520 in deductions claimed resulted in a reported Schedule C loss

of $39,520, which offset petitioners’ taxable wage and other income reported on

the 2013 income tax return. Petitioners’ 2013 Form 1040 reported tax of $54,428,

withholding of $52,910, and tax due of $1,518.

      In the notice of deficiency respondent made adjustments to the expense

deductions claimed on petitioners’ Schedule C as follows:

                                                             Adjustment in
                      Expenses                  Amount     notice of deficiency
      Car and truck [mileage]                   $18,453 Disallowed in full
      Contract labor                               3,120 No adjustment
      Insurance (other than health)                  200 No adjustment
      Repairs and maintenance                      6,311 No adjustment
      Taxes and licenses                             802 No adjustment
      Travel [airplane operation]                  2,566 Disallowed in full
      Utilities                                    1,757 No adjustment
      Other--misc. material for renovation         6,311 Disallowed in full1
          Total                                   39,520

      1
          As previously indicated, petitioners conceded this adjustment.


      4
        The standard business mileage rate of 56.5 cents per mile for 2013 is set
forth in Notice 2012-72, sec. 2, 2012-50 I.R.B., 673, 673. The Court notes that
32,218 miles × 56.5 cents per mile = $18,203, but petitioners reported car and
truck expenses totaling $18,453. As previously indicated, petitioners conceded
that they overstated their mileage on their 2013 Form 1040.
                                         -7-

The notice of deficiency reflected the following:

      Thank you for your correspondence dated 12/4/15.

      Based on the information you have submitted, our determination has
      remained unchanged. There is no indication that you have carried on
      a business under IRC 162 in this year. The expenses were related to a
      ‘rehab of a home’. There is no indication per your return or previous
      returns of any profit motive. Your expenses may be considered as
      part of an investment upon the sale of the home.

      Petitioners timely filed a petition in which they assert that they should be

able to deduct the reported expenses because respondent had previously allowed

all of the Schedule C deductions for Shane Enterprises for taxable years 2011 and

2012. At the time of trial petitioners still owned the Salem house and indicated

that it was not ready to be listed for sale as Mr. Havener continued to complete

some cosmetic work.

                                    Discussion

      Petitioners assert that (1) the Salem house remodeling activity was Mr.

Havener’s trade or business during the year in issue and (2) he drove a total of

27,330 miles while working on that activity in 2013.5 Petitioners seek to deduct

(1) $2,566 in total travel expenses paid to fly the airplane between the Salem

      5
       25,145 miles between the Salem house and the Pembroke residence % 71
miles to airports near the Salem house and the Pembroke residence % 41 miles to
have the Ram inspected % 2,073 miles between the Salem house and various
hardware and other stores ' 27,330 miles.
                                          -8-

house and the Pembroke residence during the year in issue and (2) $15,4416 in

mileage for 2013. Respondent asserts that (1) Mr. Havener was not engaged in a

trade or business, (2) the claimed expenses are capital expenditures, and (3) the

claimed mileage and travel expenses are nondeductible, personal expenses.7

I.    Burden of Proof

      In general, the Commissioner’s determination set forth in a notice of

deficiency is presumed correct, and the taxpayer bears the burden of proving that

the determination is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Deductions are exceptions to the norms of capitalization. INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992). Income tax deductions and credits are a

matter of legislative grace, and the taxpayer bears the burden of proving that he is

entitled to any deduction or credit claimed. Rule 142(a); Deputy v. du Pont, 308

U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934). Taxpayers must comply with specific requirements for any deductions




      6
          27,330 miles × 56.5 cents per mile ' $15,441.
      7
        While respondent’s explanations of his theories of disallowance have been
somewhat confusing and would appear to affect all of the expense deductions
claimed on the Schedule C, respondent did not seek a further disallowance or
assert an increased deficiency for 2013. Accordingly, we resolve only those
adjustments determined in the notice of deficiency.
                                         -9-

claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. at 84; New Colonial Ice

Co. v. Helvering, 292 U.S. at 440.

      Pursuant to section 7491(a), the burden of proof as to factual matters shifts

to the Commissioner under certain circumstances. Petitioners did not allege or

otherwise show that section 7491(a) applies. See sec. 7491(a)(2)(A) and (B).

Therefore, petitioners bear the burden of proof. See Rule 142(a).

II.   Capital Expenditures vs. Current Deductions

      Taxpayers may deduct ordinary and necessary expenses paid or incurred

during the year (1) in carrying on a trade or business and (2) for the production or

collection of income or for the maintenance of property held for the production of

income. See secs. 162, 212(1) and (2). However, no deduction is allowed for

amounts “paid out for new buildings or for permanent improvements or

betterments made to increase the value of any property or estate.” Sec. 263(a)(1);

see also sec. 1.162-1(b)(2), Income Tax Regs. Such amounts instead must be

capitalized. See sec. 1.263(a)-3, Income Tax Regs. Capital expenditures “are

added to the basis of the capital asset with respect to which they are incurred, and

are taken into account for tax purposes either through depreciation or by reducing

the capital gain (or increasing the loss) when the asset is sold.” Woodward v.

Commissioner, 397 U.S. 572, 574-575 (1970); see also INDOPCO, Inc. v.
                                         -10-

Commissioner, 503 U.S. at 83-84. It is a factual determination whether an

expense is a deductible repair or an expenditure that must be capitalized. Gibson

& Assocs., Inc. v. Commissioner, 136 T.C. 195, 233 (2011).

      A capital asset is defined by section 1221(a) as any “property held by the

taxpayer”, but under section 1221(a)(1) a capital asset does not include “property

held by the taxpayer primarily for sale to customers in the ordinary course of his

trade or business”. The purpose of this exception is to differentiate between gain

derived from the everyday operations of a business and gain derived from assets

that have appreciated in value over a substantial period. Malat v. Riddell, 383

U.S. 569, 572 (1966). The question of whether property is held primarily for sale

to customers in the ordinary course of a taxpayer’s business ordinarily requires a

factual analysis. Pritchett v. Commissioner, 63 T.C. 149, 162 (1974).

      Facts showing that the taxpayer (1) operated a trade or business and (2) held

the property in question primarily for sale as part of that trade or business are

required for a determination that the property in question is not a capital asset.

See sec. 1221(a)(1). To determine whether a particular property is held for sale to

customers in the ordinary course of the taxpayer’s trade or business, courts have

considered the following factors: (1) the taxpayer’s purpose in acquiring the

property; (2) the purpose for which the property was subsequently held; (3) the
                                         -11-

taxpayer’s everyday business and the relationship of the income from the property

to the taxpayer’s total income; (4) the frequency, continuity, and substantiality of

sales of property; (5) the extent of developing and improving the property to

increase the sale revenue; (6) the extent to which the taxpayer used advertising,

promotion, or other activities to increase sales; (7) the use of a business office for

the sale of property; (8) the character and degree of supervision or control the

taxpayer exercised over any representative selling the property; and (9) the time

and effort the taxpayer habitually devoted to sales of property. United States v.

Winthrop, 417 F.2d 905, 910-911 (5th Cir. 1969); see also Cottle v.

Commissioner, 89 T.C. 467, 487 (1987). Although these factors may aid the

finder of fact in determining, on the entire record, the taxpayer’s primary purpose

for holding property, they have no independent significance and individual

comment on each factor is not necessary or required. Cottle v. Commissioner, 89

T.C. at 487-489.

      The Code does not define the term “trade or business”. Whether a

taxpayer’s activities constitute the carrying on of a trade or business requires an

examination of the facts and circumstances of each case. Commissioner v.

Groetzinger, 480 U.S. 23, 36 (1987). The management of personal investments,
                                         -12-

no matter how extensive, is not a “trade or business.” Whipple v. Commissioner,

373 U.S. 193, 200 (1963).

      Petitioner testified that he wanted to work on the Salem house because he

was “going stir crazy being retired” and that “I’m retired and on a fixed income

* * * [t]he money that I’ve invested into this project has come out of my life

savings * * * I’ve been putting money into it. There’s no money coming out of it.

It’s not a job. I don’t get any money until I sell the house.”

      Although petitioner provided records to verify his mileage and travel

expenses, there is no other evidence in the record indicating that he conducted the

Salem house remodeling activity as a trade or business. For example, petitioner

asserted that he paid expenses for the Salem house remodeling activity with a

specific credit card, but he did not assert nor does the record reflect that he kept

other books and records or that he conducted the activity in a businesslike manner.

Petitioner did not maintain an office for the Salem house remodeling activity. He

paid for all the supplies used and work performed on remodeling the Salem house

with petitioners’ personal funds. Additionally, petitioners’ income consisted

mainly of Ms. Costa’s wage or salary income and Mr. Havener’s retirement

income, and they did not receive any income from the Salem house before, during,

or after the year in issue. Petitioners have not asserted nor does the record reflect
                                         -13-

that they received income from any other real estate properties. See United States

v. Winthrop, 417 F.2d at 910-911; Cottle v. Commissioner, 89 T.C. at 487.

      Facts indicating that a taxpayer engages in regular (rather than isolated or

sporadic) sales of property support a finding that the taxpayer is engaged in a trade

or business. Evans v. Commissioner, T.C. Memo. 2016-7, at *26; see, e.g., Ayling

v. Commissioner, 32 T.C. 704, 709-710 (1959) (13 sales over four years did not

establish frequency of sales characteristic of a business). The frequency and

substantiality of sales are especially probative “because the presence of frequent

sales ordinarily belies the contention that property is being held ‘for investment’

rather than ‘for sale.’” Suburban Realty Co. v. United States, 615 F.2d 171, 178

(5th Cir. 1980).

      Petitioners have not asserted nor does the record reflect that they acquired

and sold any properties before purchasing the Salem house. Additionally, on the

basis of this record it does not appear that petitioners purchased any other

properties after purchasing the Salem house. Thus, it does not appear that

petitioners sold any properties. See Suburban Realty Co., 615 F.2d at 178; Ayling

v. Commissioner, 32 T.C. at 709-710; Evans v. Commissioner, at *26.

Petitioners’ lack of sales over several years is not characteristic of a business.
                                          -14-

      On the basis of this record, we conclude that petitioner was not engaged in a

trade or business. Instead, the Salem house remodeling activity was at best an

investment activity. See Commissioner v. Groetzinger, 480 U.S. at 36; Whipple v.

Commissioner, 373 U.S. at 200. We therefore sustain respondent’s determination

that the house was a capital asset.

      In the notice of deficiency respondent determined that “[y]our expenses may

be considered as part of an investment upon the sale of the home.” Capital

expenditures are those that (1) create or improve a separate and distinct asset,

(2) produce a significant future benefit, or (3) are incurred in connection with the

acquisition of a capital asset. Lychuk v. Commissioner, 116 T.C. 374, 385-386

(2001). Only those expenditures that are made to restore property to a sound state

or to mend it, with the purpose of keeping the property in an ordinarily efficient

operating condition, may be deducted. Ill. Merchs. Tr. Co. v. Commissioner,

4 B.T.A. 103, 106 (1926). On the other hand, expenditures for replacements,

alterations, improvements, or additions which prolong a property’s life, increase

its value, or make it adaptable to a different use are treated as additions to capital.

Id.; Niv v. Commissioner, T.C. Memo. 2013-82, at *19.

      On the basis of this record, the various improvements petitioner made to the

Salem house, a capital asset, were a part of a plan of capital rehabilitation or
                                        -15-

improvement. He purchased a house that was considered “uninhabitable” and

made a number of improvements to make the property habitable and to increase its

value for eventual resale. The various replacements and additions, such as

installing a well and adding insulation and central heat, added to the property’s

value and extended its life. Thus, all expenses paid or incurred as part of this plan

of capital rehabilitation or improvement are eligible for treatment only as capital

expenditures. Lychuk v. Commissioner, 116 T.C. at 385-386; Ill. Merchs. Tr. Co.

v. Commissioner, 4 B.T.A. at 106; Niv v. Commissioner, at *19.

       Therefore, petitioners cannot currently deduct any of the expenses paid or

incurred in taxable year 2013 as part of the Salem house remodeling activity.

Instead, those expenses are eligible for treatment as capital expenditures under

section 263(a)(1). See INDOPCO, Inc. v. Commissioner, 503 U.S. at 83-84;

Woodward v. Commissioner, 397 U.S. at 574-575.

III.   Conclusion

       For the reasons stated above, the Court sustains respondent’s determination

that petitioners may not deduct the claimed expenses for 2013.8 Because


       8
        Since we conclude that petitioners may not deduct the reported expenses
under either sec. 162 or sec. 212, we need not and do not address respondent’s
assertion that the mileage and travel expenses are also nondeductible, personal
expenses.
                                        -16-

petitioners are not entitled to deduct any of these expenses, the Salem house

remodeling activity should not have been reported on a Schedule C.

      As a final matter, petitioners contend that they should be entitled to deduct

the reported expenses because they were permitted to deduct similar expenses for

prior years. Each tax year stands on its own and must be separately considered.

The Commissioner is not bound for any given year to allow a deduction permitted

for a prior year. See United States v. Skelly Oil Co., 394 U.S. 678, 684 (1969);

Pekar v. Commissioner, 113 T.C. 158, 166 (1999).

      We have considered the parties’ other arguments, and to the extent not

discussed herein, we find those arguments are moot, irrelevant, or without merit.

      To reflect the foregoing and respondent’s concession of the section 6662(a)

penalty,


                                                     Decision will be entered for

                                               respondent as to the deficiency and

                                               for petitioners as to the accuracy-

                                               related penalty under section 6662(a).
