                  T.C. Summary Opinion 2001-87



                     UNITED STATES TAX COURT



         TOD McMULLEN AND ROBBIN EVERSON, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12373-99S.                     Filed June 13, 2001.



     Tod McMullen and Robbin Everson, pro sese.

     G. Michelle Ferreira, for respondent.



     CARLUZZO, 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.
                                 - 2 -

     Respondent determined a deficiency of $5,920 in petitioners’

1995 Federal income tax.   The issue for decision is whether

petitioners are entitled to various deductions claimed on a

Schedule C, Profit or Loss From Business, included with their

1995 Federal income tax return.

Background

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

Petitioners are husband and wife.    They filed a timely 1995 joint

Federal income tax return.   At the time the petition was filed,

petitioners resided in Alameda, California.   References to

petitioner are to Tod McMullen.

     On June 25, 1984, petitioner applied for a United States

patent for an auxiliary or secondary oil filtration system for

automobile internal combustion engines (the system).   His

application was approved and he was issued a patent on December

31, 1985.    During 1985, petitioner consulted with a professional

income tax return preparer and was advised in a letter dated

August 9, 1985, how expenditures made in connection with the

patent process could be treated for Federal income tax purposes.

     Petitioner unsuccessfully attempted to license the patent to

the Amway Corporation in 1986.    Sometime thereafter, petitioner

decided to manufacture and market the system.   The amount of time

and effort petitioner devoted to this pursuit over the years is
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not entirely clear.    It appears that petitioner’s marketing

efforts consisted primarily of promoting the system through “word

of mouth” advertising.    Petitioner tested the system by

installing it in his vehicles.    It appears that there were

relatively few sales from the date of the patent through the year

in issue.

     After the patent was issued in 1985, petitioner made some

changes to the system.    Prior to 1995, petitioner adapted the

system for use in automobile hydraulic power steering systems and

automobile automatic transmissions.      In 1992, or thereabouts,

petitioner began to develop what he described as “curious motor

oils” or “teflon particle saturated oils” for use with the

system.   According to petitioner, if a motorist used the system

and one of the motor oils that he claims to have developed, oil

changes would be virtually eliminated.

     Robbin Everson was a salesperson for Mary Kay Cosmetics,

Inc. during the year in issue.    In 1993, as a salesperson for

that company, she was provided with a new, 1993 Pontiac Grand Am,

leased for a 2-year period on her behalf by the company, at the

company’s expense.    Upon the expiration of the lease in 1995,

petitioners were entitled to purchase the car, which they did

for $7,836.   During 1995, petitioners also purchased a computer
                                   - 4 -

printer for $287 and a 1972 Dodge van1.

     Petitioners’ 1995 joint Federal income tax return was timely

filed.       Petitioners did not elect to itemize deductions for

1995.       Included with that return is a Schedule C for petitioner’s

business, identified as Micron Systems.         The primary business

of Micron Systems is described on the Schedule C as

“developing/improving patentable products”.         The following

items are reported on the Schedule C:

Income

Gross receipts                          $492
Returns/allowances                       330
Cost of goods sold                     3,502

Gross income                          (3,340)

Deductions

Advertising                             $320
Car and truck                          1,264
Depreciation/sec. 179
  expense deduction                   10,312
Insurance                                533
Office                                 1,565
Rent/lease                             3,240
Supplies                               1,008
Taxes/licenses                            60
Meals/entertainment                      641
Utilities                                181
Other                                  1,020

  Total expenses                      20,144

  Net Loss                            23,484


        1
       According to the Form 4562, Depreciation and Amortization,
included with petitioners’ 1995 joint Federal income tax return,
the cost of the van was $2,189. According to the parties’
stipulation, the cost of the van was $952.
                               - 5 -

The deduction for advertising relates to expenditures for 35mm

film, film processing, and photocopying.   The deduction for car

and truck expenses relates to mileage driven on a 1993 Mazda MPV,

the cost of which was deducted in a prior year under section 179.

The depreciation and section 179 deduction includes the costs of

the 1993 Pontiac Grand Am, the 1972 Dodge Van, and the computer

printer.   The deduction for insurance relates to automobile

insurance on petitioners’ automobiles.   The deduction for office

expense includes expenditures for magazine and newspaper

subscriptions.   The deductions for rent and utilities relate to

home office expenses.   The deduction for taxes and licenses

relates to registration fees for petitioners’ automobiles.     The

deduction for other expenses relate to the cost of driving the

Mazda MPV on a trip described by petitioner as follows:

     It was a scenic trip, San Diego [where petitioners
     lived at the time], customer in Bakersfield, customer
     in - - no, that was it, the guy was in Bakersfield.
     The guy that had been a diesel engine rebuild mechanic
     who gave us a great reference. He was in –- he was
     moving to Iowa, so I outfitted him, and that was in
     part of the gross sales –- no, wait, I –- he didn’t
     have any money, so I sold it to him on credit and never
     collected, come to think of it.

The net loss claimed on the Schedule C offset other income

reported on petitioners’ return.

     In the notice of deficiency, respondent disallowed the

deduction for the net loss.
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Discussion

     Petitioners claim they are entitled to a deduction for the

net loss reported on the Schedule C under the authority of either

section 162 or section 174.     In general, a taxpayer is entitled

to deductions for “all the ordinary and necessary expenses paid

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

business”.    Sec. 162(a).   Furthermore, a taxpayer is generally

entitled to deductions for research and experimental expenditures

paid or incurred during the taxable year “in connection with” the

taxpayer’s trade or business.     Sec. 174(a).    A taxpayer who

claims a deduction under either section must be engaged in a

trade or business.    See Commissioner v. Groetzinger, 480 U.S. 23,

35 (1987); Green v. Commissioner, 83 T.C. 667, 686-687 (1984).

Respondent argues that petitioner was not engaged in a trade or

business during 1995.   For the following reasons, we agree with

respondent.

     Although the term “trade or business” is not specifically

defined in the Internal Revenue Code, “to be engaged in a trade

or business, 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, supra at 35.        A sporadic activity

does not qualify as a trade or business.      See id.; see also Green

v. Commissioner, supra at 686-687.       We assume, without finding,
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that petitioner intended to profit from the development and

subsequent sales of the system and related products.   See, e.g.,

Snow v. Commissioner, 416 U.S. 500 (1974); Louw v. Commissioner,

T.C. Memo. 1971-326.   Nevertheless, petitioners failed to

establish that, with respect to Micron Systems, petitioner

engaged in any activity with regularity and continuity during

1995 so as to consider the activity a trade or business for

purposes of section 162 or 174 for that year.

     The operation of petitioners’ vehicles in which the system

had been installed, in and of itself, does not support the

deductions here in dispute.   Otherwise, petitioners provided

little detail of what petitioner was doing on a day-by-day basis

during the year in issue.   We cannot determine whether he was

actively involved in any research and development or

manufacturing and marketing during that year.   Petitioner

explained that prior to 1995 he decided to manufacture and market

the system himself after unsuccessfully attempting to license it,

but there is no evidence that petitioner manufactured anything

during 1995, and, other than his generalized testimony on the

point, there is no evidence that he was otherwise researching or

developing any products for sale or patents during that year.

Based upon the negligible gross receipts for the year in issue,

it also appears that petitioner made very little attempt to sell
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anything.2    See Bendetovitch v. Commissioner, T.C. Memo. 1993-

443.

       As evidence of his sales efforts, petitioner provided

numerous testimonial type letters to petitioner regarding Micron

Systems.     However, none relate to the year 1995.3

       Furthermore, focusing on each deduction provides no

meaningful insight into the nature of petitioner’s activities

during 1995.     At trial, petitioners conceded that they were not

entitled to some of the deductions.      Some of the deductions not

conceded could not be explained; others relate to expenses that

would have otherwise been incurred regardless of the activity.

       We understand that 10 years prior to the year in issue,

petitioner obtained a patent on the auxiliary oil filtration

system for internal combustion engines.     We think it likely that

petitioner intended to make a profit from it someday.     However,

petitioners failed to explain, and we cannot devine, what

petitioner was doing in 1995 that would entitle them to the



       2
       We cannot determine the source of the gross receipts
reported on the Schedule C.
       3
       One letter dated March 31, 1999, addressed to petitioner
at his home address is prepared on letterhead of Compuware,
Oakland, California, and signed by Robbin Everson, one of the
petitioners in this case. The subject of this letter is
petitioners’ 1993 Pontiac Grand Am. Another letter was written
by a service manager of SuperShuttle in 1991. Petitioner
discontinued his relationship with SuperShuttle in 1994.
                               - 9 -

deductions claimed on the Schedule C.     See Karara v.

Commissioner, T.C. Memo. 1999-253, affd. without published

opinion 214 F.3d 1358 (11th Cir. 2000).      It follows that

respondent’s disallowance of the loss that results from those

deductions is sustained, and we so hold.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     Based on the foregoing,

                                            Decision will be

                                       entered for respondent.
