Tax Court in Brief | Kellett v. Commissioner | Start-Up, Research Expenses, and Other Itemized Business Deductions

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The Tax Court in Brief – June 13th – June 17th, 2022

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation:  The Week of June 13th, 2022, through June 17th, 2022

Kellett v. Comm’r, T.C. Memo 2022-62 | June 14, 2022 | Greaves, J. | Dkt. No. 21518-18

Short Summary: The IRS disallowed a $25,922 business expense deduction resulting in a corresponding deficiency of $6,475 in 2015. The taxpayer ran a business information website which started upon the opening of the website in September 2015. The business compiled demographic, social, and economic data and attempted to make a user-friendly version of Google or Yahoo Finance. He worked with engineers to develop features that he wanted on the website and hired a marketing specialist. Initially, he envisioned the business would generate revenue from advertising, a paywall, selling personalized reports, and/or licensing fees for use of data. He did not pursue these strategies in 2015 and did generate revenues until 2019. On his timely filed 1040, the taxpayer claimed expense deductions for the engineers, a marketing strategist, cell and internet service cost from his home, and some miscellaneous expenses. The IRS denied all deductions on the grounds that the business had not started.

Key Issues:

Primary Holdings:

Key Points of Law:

Insights: There are some very key points of law here for any entrepreneur. Firstly, the costs of start-up are subject to a rather harsh regime in the Code. § 195 will force a taxpayer to deduct costs over 15 years (180 months) in some circumstances. Oddly, upon the disposition of the business, these amortization payments would be accelerated and taken as a loss if permitted under § 165. Thus, this taxpayer may find relief in some form of reorganization. Additionally, this opinion highlights the analysis for when a business starts for federal tax purposes. It may be different than most people would think, and it depends on the archetype of the business i.e., retail grocers vs. internet information. Moreover, it may change depending on the proper appeals jurisdiction for a taxpayer. This opinion also highlights Rev. Proc. 2000-50 and whether it establishes a deduction. The court leaves open the possibility that it would if a taxpayer could establish it is harmonious with a specific provision under the Code.

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