The Tax Court held that a taxpayer's farming venture was still in its startup phase in the tax year at issue, denying claimed business expense deductions.
Facts: Vardan Antonyan bought 10 acres in the Mojave Desert of Southern California, intending to develop it and rent parcels to farmers. Antonyan created a business plan for the development, which he called Paradise Acres, that included building a barn, obtaining a certificate of compliance with organic farming standards from the U.S. Department of Agriculture, installing an irrigation system, and constructing a road to the tract. Before 2015, he began installing a rainwater collection system and tank. He mapped the acreage and planted a cactus garden and trees.
In 2015, Antonyan incurred expenses of beginning to build the barn and road, working on those projects only on weekends, since he continued working full time as an engineer. Antonyan and his wife filed a joint individual income tax return for 2015 that included a net loss by Paradise Acres on Schedule C, Profit or Loss From Business, of more than $25,000.
The IRS determined a deficiency, disallowing business deductions for car and truck expenses and travel and other expenses. The taxpayers petitioned the Tax Court.
Issues: The IRS argued that Paradise Acres was not an active trade or business under Sec. 162(a) during 2015, as Antonyan had not carried out any of the steps in his business plan, his experiments with cacti and trees notwithstanding. The taxpayers argued that the organic farming certificate was not required for leasing the tract for nonorganic farming and that Antonyan had engaged prospective customers interested in using it for dog breeding, farming cacti, and growing cannabis.
Holding: The Tax Court agreed with the IRS and sustained its disallowance of car and truck and travel expenses. Even if executing the steps in his business plan was not necessary to rent the property, Antonyan did not provide evidence other than his testimony to establish he held it out for that purpose or engaged with, or received offers from, potential customers. The court further upheld the IRS's disallowance of other startup costs, noting that under Sec. 195(b), up to $5,000 per year of such costs (reduced by the amount by which they exceed $50,000 and with any remainder amortized over 180 months), may be deducted, beginning in the tax year and month in which the trade or business begins. Again, because Paradise Acres had not begun as a trade or business in 2015, the startup expenses could not be deducted either, the court held.
Observation: The case illustrates the importance when claiming business deductions of establishing that a trade or business is active. As the court noted, this is a facts-and-circumstances determination for which courts have examined taxpayers' intention of earning a profit, their regular and active involvement in the activity, and whether the activity has "actually commenced." What suffices to cross the threshold from "initial research into or investigation of business potential" (McKelvey, T.C. Memo. 2002-63) to applying such research and exploiting the potential may be best discerned by analogous cases, such as McKelvey, one in a line of tree-farming cases. The taxpayer in that case tested whether his land could support a particular species of tree but had not yet harvested existing trees or planted new ones. One lynchpin for a farming business as a going concern therefore could be significant commercial production and planting or replenishing of crops or livestock.
As for Antonyan's intended rental of farming plots, a number of cases have analyzed when a rental business begins, such as Keefe, T.C. Memo. 2018-28. Tests can include the taxpayer's efforts to rent the property, maintenance and repairs performed on it, labor to manage the property or provide services to tenants, and collection of rent.