                   T.C. Summary Opinion 2011-92



                      UNITED STATES TAX COURT



         STEPHEN L. AND DARLENE G. MORGAN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22339-09S.             Filed July 14, 2011.



     Stephen L. and Darlene G. Morgan, pro sese.

     Amber N. Becton and Nancy W. Hale, for respondent.



     HAINES, 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 reviewable by any other court, and



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and Rule
references are to the Tax Court Rules of Practice and Procedure.
Amounts are rounded to the nearest dollar.
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this opinion shall not be treated as precedent for any other

case.

     Respondent determined a deficiency in petitioners’ 2006

Federal income tax of $12,979.     The deficiency resulted from the

denial of deductions for expenses claimed in connection with

petitioner Stephen Morgan’s (Mr. Morgan) real estate remodeling

activities.    We must decide:   (1)   Whether petitioners are

entitled to deduct section 162 expenses of $625; (2) whether

petitioners are entitled to deduct a section 179 expense of

$33,836; and (3) whether petitioners are entitled to deduct truck

expenses of $2,622.

     The parties’ stipulation of facts, supplemental stipulation

of facts, and attached exhibits are incorporated herein by this

reference.    Petitioners resided in Tennessee when they filed

their petition.

     Mr. Morgan worked in the construction business throughout

most of his career.    On July 20, 2006, Mr. Morgan sold his

interest in JBS Enterprises, L.L.C., an Alabama limited liability

company, for $1,206,806, a 2006 Dodge Ram truck, and a travel

trailer (the JBS transaction).     The sales document states that

the $1,206,806 comprises a cash distribution of profits from

operations of $870,191, a purchase of Mr. Morgan’s interest in

real estate assets totaling $315,083, and a purchase of Mr.

Morgan’s interest in equipment totaling $21,532.      Further, the
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sales document allocates a price of $33,836 to the 2006 Dodge Ram

and $16,836 to the travel trailer.

     After the JBS transaction had closed, Mr. Morgan pursued

opportunities in the redevelopment of distressed residential real

estate.   With the help of a realtor, Mr. Morgan began searching

for suitable properties.   On October 10, 2006, he purchased a

property at 3524 Maxey Road, Cedar Hill, Tennessee (the Cedar

Hill property).   On November 10, 2006, he purchased a property at

622 S. 14th Street, Nashville, Tennessee (the Nashville

property).    After renovations, Mr. Morgan sold the Nashville and

Cedar Hill properties on November 11 and December 28, 2007,

respectively.   His net return on the Cedar Hill property was a

loss of $13,492, and his net return on the Nashville property was

a gain of $12,710.   Mr. Morgan kept records and receipts of cell

phone and supply expenses related to the Cedar Hill and Nashville

property renovations in 2006.   Mr. Morgan also has detailed

expense logs related to each property for 2007.

     Petitioners have not purchased any other properties for

renovation.   Mr. Morgan decided that because the real estate

market was weak by the time he sold the Cedar Hill and Nashville

properties in 2007, it would be foolish to continue purchasing

properties when he would be unable to resell them.

     Mr. Morgan testified that he used the 2006 Dodge Ram

acquired in the JBS transaction exclusively in his activities
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renovating the Cedar Hill and Nashville properties.    Beginning on

October 5, 2006, Mr. Morgan kept a log to track the miles driven

in the 2006 Dodge Ram.    Mr. Morgan’s mileage logs show that from

October 5 through December 31, 2006, the 2006 Dodge Ram was

driven 1,138 miles in connection with his renovation activities.

Petitioners claimed truck expense deductions on their 2006

Federal income tax return using the business standard mileage

rate and the difference between readings on the 2006 Dodge Ram’s

odometer from July 20, 2006, the date it was acquired, through

December 31, 2006.    Petitioners owned two other vehicles for

their personal use.

     Petitioners timely filed their joint Form 1040, U.S.

Individual Income Tax Return, for 2006.    On Schedule C, Profit or

Loss From Business, petitioners reported gross receipts of zero

with respect to Mr. Morgan’s renovation activities and deductions

of $2,622 for car and truck expenses, $33,836 for depreciation

and section 179 expenses, and $625 for other expenses.    On August

18, 2009, respondent timely issued a notice of deficiency

disallowing petitioners’ Schedule C deductions.    Petitioners

timely filed their petition with this Court on September 18,

2009.
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                            Discussion

I.   Trade or Business

     Deductions are a matter of legislative grace, and the

taxpayer must prove he is entitled to the deductions claimed.

Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).   Section 162(a) provides that “There shall be allowed as

a deduction all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business”.   Taxpayers are required to maintain records sufficient

to establish the amounts of allowable deductions and to enable

the Commissioner to determine the correct tax liability.     Sec.

6001; Shea v. Commissioner, 112 T.C. 183, 186 (1999).

     To determine whether a taxpayer is conducting a trade or

business requires an examination of the facts involved in each

case.   Higgins v. Commissioner, 312 U.S. 212, 217 (1941).    For a

taxpayer to be engaged in a trade or business, the primary

purpose for engaging in the activity must be for income or

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

     Factors to be considered in determining whether an activity

is engaged in for profit include:   (1) The manner in which the

taxpayer carries on the activity; (2) the expertise of the

taxpayer or his advisers; (3) the time and effort expended by the

taxpayer in carrying on the activity; (4) the expectation that

assets used in the activity may appreciate in value; (5) the
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success of the taxpayer in carrying on similar or dissimilar

activities; (6) the taxpayer’s history of income or losses with

respect to the activity; (7) the amount of occasional profits, if

any, which are earned; (8) the financial status of the taxpayer;

and (9) the elements of personal pleasure or recreation.       Golanty

v. Commissioner, 72 T.C. 411, 426 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(b), Income Tax

Regs.   No single factor or group of factors is determinative.

Sec. 1.183-2(b), Income Tax Regs.      A final determination is made

only after considering all facts and circumstances.      Id.

     Respondent argues that petitioners have failed to establish

that Mr. Morgan’s renovation activities qualify as a trade or

business pursuant to section 162.    Petitioners argue to the

contrary.   We agree with petitioners.

     Mr. Morgan’s work and behavior in connection with the search

for, purchase, renovation, and sale of the Cedar Hill and

Nashville properties clearly establish that he treated his

activities as a trade or business.     He used his knowledge of the

construction business and interest in real estate to purchase and

renovate the Cedar Hill and Nashville properties.     He purchased

and renovated these properties in late 2006 and early 2007, just

before the real estate market crashed.     He carefully tracked his

expenses related to each project throughout 2006 and 2007, as

well as his net profits and losses.     When Mr. Morgan realized
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that the prospects of future profits from his renovation

activities were bleak, he decided to cut his losses and get out

of the business, thereby demonstrating a profit objective.

Accordingly, Mr. Morgan’s real estate renovation activity in 2006

constitutes a trade or business pursuant to section 162.

II.   Other Expenses

      Items described in section 274 are subject to strict

substantiation rules.    Petitioners reported gross receipts of

zero with respect to Mr. Morgan’s renovation business and

deductions of $2,622 for car and truck expenses, $33,836 for

depreciation and section 179 expenses, and $625 for other

expenses.   The other expenses consisted of costs related to Mr.

Morgan’s cell phone and supplies used for renovations.    Mr.

Morgan kept records and receipts of cell phone and supply

expenses with respect to the Cedar Hill and Nashville property

renovations in 2006.    See secs. 274(d)(4), 280F(d)(4)(A)(v).

Accordingly, petitioners are entitled to their claimed deduction

of $625 for cell phone and supply expenses.

III. Section 179 Expense

      Subject to certain limitations, taxpayers purchasing

qualifying property may elect under section 179 to deduct the

cost of the property in the year the property is placed in

service.    Qualifying section 179 property includes tangible

property that is depreciable under section 168 and is described
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in section 1245(a)(3) and computer software that is depreciable

under section 167 and described in section 1245(a)(3), but only

if the property is acquired for use in the “active conduct of a

trade or business.”   Sec. 179(d)(1).   “[A]ctive conduct” means

that the taxpayer actively participates in the management or

operations of the trade or business.    Sec. 1.179-2(c)(6)(ii),

Income Tax Regs.   As used in section 179 the term “trade or

business” has the same meaning as in section 162 and the

regulations thereunder, and therefore property held merely for

the production of income does not qualify as section 179

property.   Sec. 1.179-2(c)(6)(i), Income Tax Regs.

     As discussed above, Mr. Morgan’s activities with respect to

the Cedar Hill and Nashville properties constituted a trade or

business pursuant to section 162.   Thus, his activities also

qualify as a trade or business pursuant to section 179.    He used

the 2006 Dodge Ram exclusively in the active conduct of his trade

or business.

       The sales document allocates $33,836 to the 2006 Dodge

Ram, and petitioner deducted that amount as an expense pursuant

to section 179(a).    There are two relevant limitations that apply

to the section 179 deduction:   (1) The section 179 expense cannot

exceed $100,000, pursuant to section 179(b)(1) as in effect in

2006; and (2) section 179(b)(3) provides that the section 179

deduction cannot exceed the “aggregate amount of taxable income
                                - 9 -

of the taxpayer for such taxable year which is derived from the

active conduct by the taxpayer of any trade or business during

such taxable year.”    Petitioners reported gross receipts of zero

in 2006 from Mr. Morgan’s renovation business.   However, $870,191

of the $1,206,806 in cash Mr. Morgan received as part of the JBS

transaction was a distribution of profits from operations.   The

second limitation on the section 179 deduction applies to the

“aggregate” of “any trade or business” during the taxable year.

Accordingly, petitioners have sufficient taxable income from the

active conduct of a trade or business in 2006 and are entitled to

deduct their claimed section 179 expense of $33,836.

IV.   Truck Expenses

      Pursuant to section 274(d), truck expenses otherwise

deductible as business expenses will be disallowed in full unless

the taxpayer satisfies strict substantiation requirements.   The

taxpayer must substantiate the truck expenses by adequate records

or other corroborating evidence of items such as the amount of

each expense, the time and place of the truck’s use, and the

business purpose of its use.   See Sanford v. Commissioner, 50

T.C. 823, 827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir.

1969); Maher v. Commissioner, T.C. Memo. 2003-85.    A taxpayer may

also choose to use the business standard mileage rate to

determine a truck expense deduction in lieu of actual expenses.

Nash v. Commissioner, 60 T.C. 503, 520 (1973); Kay v.
                             - 10 -

Commissioner, T.C. Memo. 2002-197, affd. 85 Fed. Appx. 362 (5th

Cir. 2003); Rev. Proc. 2005-78, 2005-2 C.B. 1177.     However, the

business standard mileage rate may not be used to compute

deductible expenses if the taxpayer has claimed a section 179

expense deduction on the same vehicle.   Kay v. Commissioner,

supra; Rev. Proc. 2005-78, supra.

     On their 2006 Federal income tax return, petitioners claimed

a truck expense deduction using the business standard mileage

rate and odometer readings from July 20, 2006, the date the 2006

Dodge Ram was acquired, through December 31, 2006.    Petitioners

may not claim deductions with regard to the 2006 Dodge Ram for

both the section 179 expense and the standard mileage rate.

Accordingly, as we have determined that petitioners are entitled

to the section 179 expense deduction for the 2006 Dodge Ram, they

are not entitled to a truck expense deduction using the business

standard mileage rate.

     In reaching these holdings, the Court has considered all

arguments made and, to the extent not mentioned, concludes that

they are moot, irrelevant, or without merit.

     To reflect the foregoing,



                                         Decisions will be entered

                                    under Rule 155.
