                         T.C. Memo. 1998-20



                       UNITED STATES TAX COURT



         RONALD F. AND LINDA C. BERNARD, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16480-96.                     Filed January 20, 1998.



     Ronald F. Bernard, pro se.

     Jeremy McPherson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined a deficiency in

petitioners' Federal income tax in the amount of $13,029 for the

1994 tax year.

     All section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.      The sole issue for
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decision is whether petitioners are entitled to costs of goods

sold and deductions for a Schedule C model train retail business

in 1994.

                        FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    Petitioners resided in

Sacramento, California, at the time the original petition was

filed in this case.

     In 1994, Ronald F. Bernard (petitioner) quit his job with

the State of California, withdrew all his State retirement

money,1 and used this money, along with his savings, to open a

retail store specializing in model trains (the store).

Petitioner planned to call the store “California Model Trains”.

     Petitioner located a promising site for his store in a mall

(the mall) which was under construction in Folsom, California.

The contractor building the mall told petitioner that

construction would be completed in time for petitioner to occupy

the premises in November 1994.    Petitioner expected to have a

very high percentage of his annual sales occur in November and

December during the holiday season.




     1
        Petitioners reported this withdrawal--$41,323.09--as
income on their 1994 joint Federal income tax return.
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     Petitioner signed a lease for retail space in the mall in

August 1994, and paid a rent deposit of $3,750.   During 1994,

petitioner paid $15,964.41 for cabinets, shelving, and a cash

register--all of which he intended to use in the store.   During

1994, petitioner purchased $56,217.79 in inventory (model trains

and related items).   Most of the inventory petitioner purchased

were items manufacturers advertised heavily in the fall of 1994,

in the hope of selling them in November and December of that

year.   Manufacturers did not advertise those items after 1994;

they then began advertising items which they hoped to sell during

1995.   In 1994, petitioner spent $1,226.80 for advertising,

$106.05 for commissions and fees, $731.80 in interest, $3,750 in

advance rent, $417.74 for supplies, $72 for taxes and licenses,

$83.63 for utilities, and $92.45 for books and publications.

     Unusually heavy rains from September through December 1994

delayed the opening of the mall until April 1995.   The commercial

space which petitioner planned to lease was not available for

occupancy during 1994.   In April 1995, petitioner began occupying

the commercial space in the mall.

     Petitioner sold a few inventory items to acquaintances and

family during 1994.   From November 1994 through April 1995,

petitioner stored all of the remaining inventory in his home.

                              OPINION

     Respondent disallowed petitioners' claim for cost of goods

sold on Schedule C on the ground that petitioner did not sell or
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otherwise dispose of the inventory during 1994, nor did

petitioner offer the inventory for sale to customers in 1994.

Respondent also disallowed petitioners' Schedule C deductions

claimed for depreciation, rent, and other expenses, on the

grounds that petitioner had not yet begun carrying on a trade or

business and that organizational or startup expenses must be

capitalized and deducted beginning in the year that the taxpayer

begins carrying on the trade or business.

Cost of Goods Sold

     The cost of goods purchased for resale, with proper

adjustment for opening and closing inventories, is deductible

from gross sales in computing gross income.   Sec. 1.162-1(a),

Income Tax Regs.   Cost of goods sold generally is not allowable

for goods which have not been sold or otherwise disposed of

during the taxable year.   Jones v. Commissioner, 25 T.C. 1100,

1103 (1956), revd. on other grounds 259 F.2d 300 (5th Cir. 1958).

Petitioner made no sales to customers during 1994; thus he is not

entitled to a deduction for cost of goods sold in that year.2

     Petitioner contends that the inventory became worthless

during 1994.   Although not framed as an inventory accounting

issue, it appears that petitioner is essentially contending that

he should be allowed to use the lower of cost or market method of

     2
        Petitioner did realize less than $100 from casual sales
to friends and acquaintances; however, due to an oversight,
petitioner did not report the income from these sales on his 1994
Federal income tax returns.
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accounting to value his inventory at yearend.    Petitioner

testified that when the mall opened in the spring of 1995, he

moved the inventory into the store and offered it for sale to

customers.   Petitioner did not offer the inventory for sale to

customers in 1994, and he offered no other identifiable event to

substantiate the value of his inventory.    See Thor Power Tool Co.

v. Commissioner, 64 T.C. 154, 169 (1975), affd. 563 F.2d 861 (7th

Cir. 1977), affd. 439 U.S. 522 (1979).   Petitioner, therefore, is

not entitled to cost of goods sold under the lower of cost or

market method of accounting in 1994.

Startup Expenses

     Section 195 provides generally that no deduction shall be

allowed for startup expenditures; however, such expenses, at the

election of the taxpayer, may be treated as deferred expenses and

allowed as a deduction prorated equally over a period of not less

than 60 months as may be selected by the taxpayer beginning with

the month in which the active trade or business begins.    Due to

an unfortunate set of circumstances beyond petitioner's control,

petitioner did not begin a trade or business activity during

1994.   Thus, no deduction is allowable for petitioner's startup

expenses incurred in 1994.

     To reflect the foregoing,

                                                Decision will be

                                           entered for respondent.
