                        T.C. Memo. 2007-147



                      UNITED STATES TAX COURT



                  YURI G. GLOTOV, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6228-06.               Filed June 13, 2007.



     Yuri G. Glotov, pro se.

     Frederick Mutter and Carroll D. Lansdell, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined a deficiency in

petitioner’s 2003 Federal income tax of $4,721, as well as a

penalty under section 6662 of $944.1


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
                                                   (continued...)
                               - 2 -

     The issues to be decided are:     (1) Whether petitioner is

entitled to business deductions incurred in connection with his

software development activities in 2003; and (2) whether

petitioner is liable for the accuracy-related penalty under

section 6662.

                         FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.     Petitioner resided in New

York, New York, at the time the petition was filed.

     During 2003, petitioner was employed by various companies as

a computer programmer and/or consultant.     In addition, in

September 2003 petitioner purportedly initiated the development

of a computer software business in which he was the sole

proprietor.   In this capacity, he was interested in developing

software for use by financial companies.

     Petitioner timely filed his Form 1040, U.S. Individual

Income Tax Return, for 2003.   Petitioner’s Schedule C, Profit or

Loss From Business, for 2003 reported that his computer software

business had gross receipts of $17,149, incurred a car and truck

expense of $3,977, incurred a labor expense of $7,070, and




     1
      (...continued)
are rounded to the nearest dollar.
                               - 3 -

claimed a depreciation deduction of $3,4792 for the business use

of his 2001 Ford Taurus SES (Ford Taurus).   Petitioner did not

elect to amortize these deductions as startup expenditures under

section 195(b).

     In September 2005, respondent initiated an audit of

petitioner’s 2003 return.   As part of the audit, respondent

requested petitioner to provide documentation to substantiate the

Schedule C car and truck expense of $3,977, the labor expense of

$7,070, and the depreciation deduction of $3,479 (business

deductions at issue).

     At a meeting, on October 4, 2005, between respondent’s and

petitioner’s representatives, petitioner’s representative3 did

not provide any documentation to substantiate these deductions or

to show petitioner was carrying on a computer software business

in 2003.   On October 24, 2005, petitioner provided respondent

with documentation in an attempt to substantiate the Schedule C

car and truck expense and the depreciation deduction but provided

no documentation to substantiate the labor expense or to show he

was carrying on a computer software business in 2003.




     2
       The deprecation deduction of $3,479 was determined using
the 200 percent declining balance method and half-year
convention. See sec. 168(b), (d).
     3
       Petitioner’s representative was not an enrolled return
preparer, did not sign as a preparer on petitioner’s 2003 return,
and was not admitted to practice before the Tax Court.
                               - 4 -

     Respondent determined petitioner’s documentation did not

substantiate the business deductions at issue and on January 4,

2006, mailed petitioner a notice of deficiency disallowing these

deductions.   Petitioner timely filed his petition on March 30,

2006.

     On August 15, 2006, respondent’s counsel mailed petitioner a

letter requesting a meeting to discuss the case and any

documentation petitioner wanted considered.   In response, on

August 17, 2006, petitioner mailed a letter stating that he would

not meet with respondent’s counsel before trial, that respondent

had failed to comply with the Paperwork Reduction Act, and that

respondent lacked the authority to assert income tax

deficiencies.   On September 29, 2006, respondent’s counsel mailed

another letter to petitioner requesting a meeting to discuss the

case, discuss any additional information petitioner wanted

considered, and prepare a stipulation of facts.   Petitioner did

not respond to the September letter or meet with respondent’s

counsel before trial.   Petitioner signed the stipulation of facts

on the day of trial, October 25, 2006.

                              OPINION

I.   Whether Petitioner Was Carrying On a Business in 2003

     Petitioner contends the business deductions at issue were

directly related to the operation of his computer software
                                - 5 -

business in 2003 and asserts he is entitled to deduct the car and

truck expense of $3,977 and the labor expense of $7,070 under

section 162 and depreciation of $3,479 for the use of the Ford

Taurus under section 167.

     Section 162(a) allows a deduction for the ordinary and

necessary expenses of carrying on a trade or business.   For a

taxpayer to deduct expenses under section 162(a), the expenses

must relate to a trade or business functioning at the time the

expenses are incurred.   Hardy v. Commissioner, 93 T.C. 684, 686

(1989), affd. in part and remanded in part per order (10th Cir.,

Oct. 29, 1990).   A taxpayer is not carrying on a trade or

business under section 162(a) until the business is functioning

as a going concern and performing the activities for which it was

organized.   Richmond Television Corp. v. United States, 345 F.2d

901, 907 (4th Cir. 1965), vacated and remanded on other grounds

382 U.S. 68 (1965).   Carrying on a trade or business requires a

showing of more than initial research into or investigation of

business potential.   Dean v. Commissioner, 56 T.C. 895, 902

(1971); McKelvey v. Commissioner, T.C. Memo. 2002-63, affd. 76

Fed. Appx. 806 (9th Cir. 2003).   Business operations must have

actually commenced.   McKelvey v. Commissioner, supra.   Petitioner

has the burden of proving he began operating his software

development business in 2003.   See Rule 142(a).
                                - 6 -

     The record clearly indicates petitioner did not carry on a

computer software business in 2003.     Petitioner did not produce

documentation showing he operated a computer software business in

2003.   Although on his 2003 Schedule C he reported gross receipts

of $17,149 from his business, the $17,149 was paid for work

unrelated to the purported software business.

     For the foregoing reasons, this Court finds petitioner did

not carry on a trade or business as required under section 162.

Therefore, he is not entitled to deduct the car and truck expense

of $3,977 or the labor expense of $7,070.    See McKelvey v.

Commissioner, supra; Reems v. Commissioner, T.C. Memo. 1994-253;

Estate of Miller v. Commissioner, T.C. Memo. 1991-515, affd.

without published opinion 983 F.2d 232 (5th Cir. 1993).

     Petitioner also claimed a depreciation deduction under

section 167 of $3,479 for the use of his Ford Taurus in the

computer software business.    For a taxpayer to depreciate

property under section 167, the property must be used in a trade

or business or held for the production of income.     Porreca v.

Commissioner, 86 T.C. 821, 843 (1986); Flowers v. Commissioner,

80 T.C. 914, 931-932 (1983).    The trade or business requirements

under section 167 are the same as those under section 162.

Lemmen v. Commissioner, 77 T.C. 1326, 1340 n.16 (1981); Miller v.

Commissioner, supra.   Petitioner was not engaged in a trade or

business for purposes of section 162 in 2003.    Accordingly, the
                                - 7 -

property he depreciated in connection with the same activity does

not satisfy the trade or business requirement of section 167.

Therefore, this Court finds petitioner is not entitled to the

depreciation deduction of $3,479.

      The expenses petitioner purportedly incurred, if

substantiated, were at best start-up expenditures.     Startup

expenses are not deductible unless an election is made to

amortize them under section 195(b) over a period starting when an

active trade or business begins.    See sec. 195(a).   Petitioner

did not make an election under section 195(b).

II.   Tax-Protester Arguments

      Petitioner also argued that respondent had not complied with

the Paperwork Reduction Act and lacked the authority to assert

income tax deficiencies.   Petitioner’s arguments have been

rejected by this Court and other courts, and “We perceive no need

to refute these arguments with somber reasoning and copious

citation of precedent; to do so might suggest that these

arguments have some colorable merit.”    Crain v. Commissioner, 737

F.2d 1417, 1417 (5th Cir. 1984); see, e.g., Wheeler v.

Commissioner, 127 T.C. 200, 204 n.9 (2006) (an allegation that

the requirement to file a tax return is in violation of the

Paperwork Reduction Act is contrary to well-established law);

Nunn v. Commissioner, T.C. Memo. 2002-250.    This Court rejects
                               - 8 -

petitioner’s tax-protester arguments as frivolous and without

merit.

III. Section 6662 Penalty

     Respondent contends petitioner is liable for a section 6662

penalty because the underpayment of tax was attributable to

negligence or disregard of rules or regulations.

     Section 6662(a) imposes a 20-percent accuracy-related

penalty on the portion of any underpayment attributable to

negligence or disregard of rules or regulations.   Sec. 6662(b).

The term “negligence” includes any failure to make a reasonable

attempt to comply with the provisions of the Internal Revenue

Code, including any failure by the taxpayer to keep adequate

books and records or to properly substantiate items, and the term

“disregard” includes any careless, reckless, or intentional

disregard.   Sec. 6662(c); sec. 1.6662-3(b), Income Tax Regs.

Section 7491(c) provides that the Commissioner bears the burden

of production with respect to accuracy-related penalties.    See

Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).

     Although petitioner reported business costs incurred from

the operation of a computer software business in 2003, the

evidence shows that he was not carrying on a computer software

business in 2003.   He failed to keep adequate books and records

and properly substantiate the reported expenses.   Accordingly, he

was not entitled to the claimed business deductions.
                                 - 9 -

     Therefore, respondent has met the burden of production, and

petitioner, having failed to show reasonable cause or other basis

for reducing the underpayment on which the penalty is imposed, is

liable for the section 6662 penalty for negligence for 2003.       See

sec. 1.6662-3(b)(3), Income Tax Regs.       The Court, in reaching its

holding, has considered all arguments made and concludes that any

arguments not mentioned above are moot, irrelevant, or without

merit.

     To reflect the foregoing,


                                              Decision will be entered

                                         for respondent.
