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Failure to Stick to Business Plan Dooms Taxpayer's Business Expense Deductions

(Parker Tax Publishing December 2021)

The Tax Court disallowed a taxpayer's deductions for vehicle, travel, and other expenses as ordinary and necessary business deductions under Code Sec. 162(a) after finding that the taxpayer's venture to develop a piece of property, make it accessible by road, and rent it out to farmers was not an active trade or business. The court concluded that the taxpayer never accomplished any of the steps laid out in his business plan and further found that, although the taxpayer explored the property and conducted experiments on it, those activities were steps taken to set up a business but did not indicate that a business had actually begun. Safaryan v. Comm'r, T.C. Memo. 2021-138.


Around 2012 or 2013, Vardan Antonyan purchased 10 acres of property in Newberry Springs, California. The property was in the middle of the Mojave Desert, a mile away from any road and 120 miles away from the residence of Antonyan and his wife, Margarita Safaryan. Antonyan purchased the property with the intent of developing its natural resources, making it accessible by road, procuring a certification for organic farming, dividing it into parcels, and then renting the parcels to farmers. Antonyan called this venture "Paradise Acres" (Paradise Acres venture).

To effect the Paradise Acres venture, Antonyan created a business plan, which first required him to construct a nonlivable outdoor structure, similar to a barn, on the property. The business plan then required him to obtain a certification from the U.S. Department of Agriculture (USDA) certifying that the land complied with the standards set forth for organic farming. Finally, the business plan provided for the installation of an irrigation system on the property and the construction of an access road to the property.

Between the time of purchase of the property and before 2015, Antonyan partially installed a water tank and a rainwater collection system. He also explored the property and conducted a number of experiments, which included planting a small cactus garden, planting Mesquite trees, mapping the property, and determining the property's topography. In addition to learning about the property for business purposes during this period, Antonyan used the property for recreational activities, such as model rocket launches, archery, dry rock wall climbing, campfires, and camping. Antonyan and Safaryan did not claim any tax deductions relating to the Paradise Acres venture before 2015.

In 2015, Antonyan, acting as the general contractor, began the construction of his nonlivable outdoor structure on the property. He: (1) purchased building materials; (2) rented an industrial commercial truck to transport heavy loads of materials to the property; (3) rented a four-wheel tractor-trailer to transport the materials to the building site on the property; (4) established an unpaved vehicle access road to the property; and (5) hired day laborers to assist with the building of the nonlivable outdoor structure. During 2015, Antonyan worked full time as an engineer; therefore, he was available to work on the property only during weekends.

Antonyan and Safaryan filed a joint Form 1040, U.S. Individual Income Tax Return, for tax year 2015, attaching a 2015 Schedule C which listed Antonyan as the proprietor of a business activity involving "Development property in Newberry Springs" which went by the name "Paradise Acres." On the Schedule C the couple reported no gross income and claimed deductions for $12,700 of car and truck expenses, $5,580 of travel expenses, and $6,783 of other expenses, which consisted of $5,000 of startup costs and $1,783 of amortization. They reported on the Schedule C a total net loss of $25,063 for 2015. The couple also attached a Form 4562, Depreciation and Amortization, which reported a "Four Wheel Track ren[tal]" as depreciable property. With respect to "Amortization", the couple reported $26,750 of amortized costs which, when amortized over a 15-year period, resulted in $1,783 of amortization attributable to 2015. Antonyan and Safaryan reported the $1,783 of amortization as other expenses on the Schedule C. In a notice of deficiency, the IRS disallowed the deduction for car and truck expenses and other expenses as not being ordinary and necessary expenses that are deductible under Code Sec. 162. Antonyan and Safaryan took their case to the Tax Court.

Under Code Sec. 162(a), a deduction is allowed for all ordinary and necessary expenses paid or incurred during the tax year in carrying on a trade or business. In Hardy v. Comm'r, 93 T.C. 687 (1989), the Tax Court held that to be deductible under Code Sec. 162, expenses must relate to a trade or business that is functioning when the expenses were incurred. A taxpayer is not considered to have engaged in carrying on any trade or business under Code Sec. 162(a) until the business has begun to function as a going concern and has performed the activities for which it was organized. Until that time, expenses related to that activity are not "ordinary and necessary" expenses deductible under Code Sec. 162 (or under Code Sec. 212) but, rather, are classified as start-up expenses subject to Code Sec. 195. Under Code Sec. 195(b), a taxpayer may deduct for the tax year in which the active trade or business begins up to $5,000 of startup expenditures, reduced by the amount by which those expenditures exceed $50,000. The remainder is allowable as a deduction ratably over the 180-month period beginning with the month in which the active trade or business begins.

Whether a taxpayer is engaged in a trade or business is determined using a facts and circumstances test under which courts have focused on the following three factors: (1) whether the taxpayer undertook the activity intending to earn a profit; (2) whether the taxpayer is regularly and actively involved in the activity; and (3) whether the taxpayer's activity has actually begun. In the. Ninth Circuit, in order for an expense to be deductible under Code Sec. 162, a taxpayer must demonstrate that his or her "predominant, primary or principal objective" in engaging in the activity was to realize a profit.

The IRS argued that the Paradise Acres venture was not an active trade or business that begun in 2015. Thus, according to the IRS, Antonyan and Safaryan were not entitled to deduct the Schedule C expenses they reported for that year. The IRS noted that Antonyan never accomplished the first step in his business plan, i.e., the construction of the nonlivable outdoor structure. The IRS further emphasized that Antonyan failed to complete the other steps in the business plan, namely: (1) the procurement of an organic farming certification from the USDA, necessary to lease the property for organic farming; and (2) the completion of the irrigation system, necessary for farmers to grow crops in a barren land such as the Mojave Desert. The IRS acknowledged that Antonyan conducted a number of experiments on the property but asserted that these activities were insufficient to demonstrate that the Paradise Acres venture was an active trade or business for purposes of Code Sec. 162(a).

Antonyan and Safaryan contended that the procurement of an organic farming certificate was not a prerequisite for the Paradise Acres venture to begin because the land could be leased for nonorganic farming or for another purpose. Therefore, they asserted, procuring an organic farm certificate was a means to make additional profit rather than a requirement to lease the property for farming. Antonyan and Safaryan further argued that Antonyan was actively managing and engaging with customers with respect to the property during 2015 and received propositions from prospective customers interested in using the property for breeding dogs, developing a prickly pear farm, and growing cannabis.


The Tax Court upheld the IRS's determination to disallow the deductions for Antonyan's and Safaryan's Schedule C expenses. In the court's view, although Antonyan explored the property and conducted a number of experiments on it, those actions exemplified steps taken to set up a business; they did not indicate that a business had actually begun and was operating as a going concern. Moreover, the court found that during 2015 Antonyan did not complete any of the steps set forth in his business plan for the Paradise Acres venture. The court noted that by the end of 2015, Antonyan had not finished constructing the nonlivable outdoor structure, procured an organic farming certification from the USDA, or finished installing the irrigation system. Because of Antonyan's failure to complete any of the steps in his business plan, the court was not persuaded that the Paradise Acres venture was an active trade or business in 2015 for purposes of Code Sec. 162.

The court further found that even if none of the steps in Antonyan's business plan were necessary to rent the property, Antonyan and Safaryan nevertheless failed to produce any evidence to establish that Antonyan held the property out for rent during 2015. The court said that other than Antonyan's incredible testimony, the couple failed to produce any evidence to establish that Antonyan was actively managing and engaging with potential customers to rent the property during 2015 or that he received any offers from potential customers. Accordingly, the court sustained the IRS's determinations to disallow the deductions for Schedule C car and truck expenses of $12,700 and travel expenses of $5,580.

With respect to the couple's claimed deductions for $5,000 of startup costs and $1,783 of amortization, the court held that, because Paradise Acres was not an active trade or business in 2015 the couple was also not entitled to those deductions. Accordingly, the court also sustained the IRS's determination to disallow those deductions as well.

For a discussion of start-up expenses, see Parker Tax ¶95,710.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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