Sec. 212 expenses deductible prior to becoming trade or business.

AuthorToth, Julie A.

P is one of six individuals in the Pacific Northwest qualified to teach eventing at the beginning novice, novice, training and preliminary levels. In 1998, she purchased 17 acres of land and began operating a horse boarding and training facility for profit. Income from those activities was modest, increasing to approximately $3,000 per month in 2004.

P contends that the 1998 horse boarding and training expenses are deductible under Sec. 212. The IRS concedes that P engaged in horse boarding and training activities for profit beginning in 1998, but contends the expenses are nondeductible start-up expenditures under Sec. 195(a).

Law

Sec. 195 provides:

(a) Capitalization of Expenditures. Except as otherwise provided in this section, no deduction shall be allowed for start-up expenditures....

(c) Definitions. For purposes of this section--

(1) Start-up expenditures. The term "startup expenditure" means any amount--

(A) paid or incurred in connection with-- ...

(iii) any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business ... (Emphasis added.)

The Service contends that, under the cited portions of Sec. 195, the expenses paid or incurred in the income-producing activity must be capitalized, because P anticipated that the income-producing activities would become an active trade or business. However, this argument fails, for several reasons.

First, this court construes the term "start-up expenditure" to denote one that is capital rather than ordinary. This court will not interpret Sec. 195 to override the deductibility of ordinary and necessary expenses P incurred in an ongoing Sec. 212 activity, any more than it would for an ongoing Sec. 162 activity.

Because P's Sec. 212 activity had begun, Sec. 195 does not preclude the deduction of ordinary and necessary expenses paid or incurred in that activity, regardless of whether that activity is subsequently transformed into a trade or business.

This interpretation is consistent with Sec. 195 and its legislative...

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