                            T.C. Summary Opinion 2017-56



                           UNITED STATES TAX COURT



                 SAMUEL JOSEPH CARRICK, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 12198-16S.                           Filed July 20, 2017.



      Samuel Joseph Carrick, pro se.

      Jason T. Scott, for respondent.



                                SUMMARY OPINION


      PANUTHOS, Chief 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 March 2, 2016, respondent determined

deficiencies of $2,265 and $4,660 in petitioner’s 2013 and 2014 Federal income

tax, respectively.

       After concessions,2 the issue for decision is whether petitioner was engaged

in a trade or business in the years in issue and entitled to deduct expenses related

to his activities.

                                    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.

Petitioner resided in California when the petition was timely filed.

I.     General

       Petitioner has a bachelor’s degree in electrical engineering. For

approximately 15 years petitioner was employed in the oceanographic industry.



       1
        (...continued)
Internal Revenue Code in effect for the years in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
       2
       Petitioner conceded that he received and failed to report State income tax
refunds of $1,049 and $3,773 for 2013 and 2014, respectively.
                                         -3-

Before the years in issue, and during 2013 and 2014, petitioner was employed by

Remote Ocean Systems (ROS). Petitioner built underwater equipment such as

cameras, lights, thrusters, control devices, and integrative sonar.

II.     Sole Proprietorship Activities

        During the years in issue ROS was experiencing financial difficulty and

petitioner was provided some flexibility in his work schedule. Petitioner began

exploring business ventures with other individuals, using the name Trifecta United

as an umbrella name for the activities, which he named Local Bidz and Stingray

Away.

        The Local Bidz activity involved creating a website with features similar to

those of the websites of Angie’s List, Yelp, and eBay which would permit people

to bid on hiring contractors for products and repairs. Petitioner first had the idea

for Local Bidz in 2012, and he went “full force in the beginning of 2013”,

spending time accumulating data and developing software and the website. At

some point in 2013 the web developer moved to Los Angeles and other

individuals left the project. For some unspecified period in 2013 petitioner

traveled weekly from his home in San Diego to Los Angeles to consult with the

web developer. Petitioner abandoned the Local Bidz activity before the end of

2013.
                                        -4-

       Sometime in 2014 petitioner began the Stingray Away activity, which

involved researching and developing a device to prevent surfers and swimmers

from being injured by stingrays. Petitioner initially noticed that sonar devices

might affect the behavior of sharks and other species. Petitioner conducted

research at beaches in La Jolla, where swimmers and surfers often were stung and

bitten by stingrays. Petitioner did not fully develop any devices nor list any

devices for sale in 2014.

       Petitioner had no gross receipts during 2013 or 2014 from either the Local

Bidz activity or the Stingray Away activity.

III.   Tax Returns and Notice of Deficiency

       Petitioner attached Schedules C, Profit or Loss From Business, to his 2013

and 2014 Forms 1040, U.S. Individual Income Tax Return. On the 2013 Schedule

C, under the business name Trifecta United, petitioner reported zero gross receipts

and total expenses of $38,830. On the 2014 Schedule C, under the business name

Samuel J Carrick, petitioner reported zero gross receipts and total expenses of

$50,807. The expenses for each year were reported as a business loss offsetting

petitioner’s salary reported on the respective Forms 1040.

       In a notice of deficiency respondent disallowed petitioner’s claimed

deductions for meals and entertainment, travel, and car and truck expenses.
                                         -5-

Respondent disallowed $13,730 for 2013 and $21,180 for 2014. Respondent

asserts that petitioner has failed to establish that he was “carrying on” a trade or

business and, further, that even if petitioner was carrying on a trade or business he

has not substantiated the expenses underlying the claimed deductions as required

by section 274(d).3

                                     Discussion

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

shifts to the Commissioner under certain circumstances. Petitioner did not allege

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

Therefore, petitioner bears the burden of proof. See Rule 142(a).




      3
        We note that in the notice of deficiency respondent disallowed only a small
portion of the total claimed deductions for either year. While respondent’s theory
of disallowance would appear to affect all of the deductions petitioner claimed on
his Schedules C, respondent did not seek an increased deficiency for either year.
Accordingly, we resolve only those adjustments determined in the notice of
deficiency.
                                         -6-

II.   Schedule C Activities

      Petitioner asserts that the reported expenses are deductible as ordinary and

necessary business expenses relating to the activities of Local Bidz and Stingray

Away. Section 162(a) provides the general rule that a deduction is allowed for

“all the ordinary and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business”.

      It is clear that petitioner was not “carrying on” a trade or business in 2013 or

2014 when the expenditures for the Local Bidz and Stingray Away activities were

made. Carrying on a trade or business requires more than preparatory work such

as initial research or solicitation of potential customers; a business must have

actually commenced. Expenses paid after a decision has been made to start a

business, but before the business commences, are generally not deductible as

ordinary and necessary business expenses. These preparatory expenses are capital

expenditures. See secs. 162, 195; Frank v. Commissioner, 20 T.C. 511, 513-514

(1953); Shea v. Commissioner, T.C. Memo. 2000-179, 2000 WL 688593, at *5

n.10; Christian v. Commissioner, T.C. Memo. 1995-12, 1995 WL 9151, at *5.

      While petitioner may have been conducting research in 2013 with respect to

Local Bidz or in 2014 with respect to Stingray Away, neither activity reached the

point of actually commencing. There was neither sales activity nor evidence of
                                         -7-

the offering of products or services to the public. Petitioner was still in the very

early stages of research and development in each of these activities. There is

nothing in the record indicating that petitioner had commenced any business

activity as a sole proprietor. We conclude that petitioner was not “carrying on” a

trade or business in 2013 or 2014. See secs. 162, 195; Frank v. Commissioner, 20

T.C. at 513-514; Shea v. Commissioner, 2000 WL 688593, at *5 n.10; Christian v.

Commissioner, 1995 WL 9151, at *5.4

      As we have concluded that petitioner is not entitled to any of the claimed

deductions as discussed herein, we need not and do not consider the issue of

whether he properly substantiated the expenses underlying the claimed deductions.

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

addressed herein, we conclude that they are moot, irrelevant, or without merit.

      To reflect the foregoing,


                                               Decision will be entered

                                        for respondent.


      4
        At trial the Court inquired of respondent’s counsel whether petitioner might
be entitled to a deduction for startup expenditures under sec. 195. Respondent
correctly points out that petitioner has been allowed deductions for startup
expenditures beyond the amounts allowed under sec. 195(b). Accordingly, sec.
195 is of no assistance to petitioner.
