                          T.C. Summary Opinion 2020-2



                        UNITED STATES TAX COURT



                JAMES GORDON PRIMUS, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 20640-17S.                        Filed January 7, 2020.



      James Gordon Primus, pro se.

      Bryon M. Huang and Gennady Zilberman, for respondent.



                              SUMMARY OPINION


      COLVIN, Judge: This case was heard pursuant to the provisions of section

74631 of the Internal Revenue Code in effect when the petition was filed.


      1
       Section references are to the Internal Revenue Code in effect at all relevant
times. We round all monetary amounts to the nearest dollar. Petitioner resided in
                                                                      (continued...)
                                         -2-

Pursuant to section 7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent for any other case.

      Respondent determined that petitioner had deficiencies of $45,116 for 2012

and $41,001 for 2013. The issue for decision is whether expenses petitioner paid

in those years in anticipation of the production of maple syrup and blueberries

were nondeductible startup expenses. We hold that they were.

                                    Background

      Some of the facts have been stipulated and are so found. During the years at

issue, 2012 and 2013, petitioner lived in New York, where he worked as an

accountant at a large accounting firm.

A.    The Quebec Property

      During 2010 and 2011 petitioner viewed several properties for sale in

southwest Quebec. He observed that one of those properties, consisting of 266

acres, contained almost 200 acres of maple trees,2 including more than enough

mature maple trees to produce maple syrup commercially. Petitioner’s mother




      1
      (...continued)
Quebec, Canada, when he filed the petition.
      2
      Maple syrup producers refer to a grove or forest comprising maple trees as
a “maple bush”. We have used that phrase occasionally herein.
                                         -3-

acquired the property in September 2011,3 and petitioner maintained constructive

ownership from September 2011 throughout the years at issue.4

      In addition to maple trees, the property included areas with other species of

trees, overgrown pastures, and hay fields; and 12 acres suitable for growing crops.

The property also contained various improvements, e.g., a main house, two

apartments, a garage, a barn, a horse riding arena, and a building with a pool and a

gymnasium.

      1.     Petitioner’s Maple Trees and Plans To Produce Maple Syrup

      When petitioner purchased the property, most of the maple trees were large

enough to produce sap.5 Before collecting sap and producing syrup, petitioner

wanted to thin the maple bush, which would cause the trees to produce more and

better sap, and install a system of pipes (pipeline) to collect sap. Petitioner would

not be able to thin the maple bush after he installed the pipeline to collect sap. He

began thinning the maple bush in 2011 and continued thinning in the years at


      3
       To buy property in Quebec the buyer must meet a residency test.
Petitioner’s mother qualified, but petitioner, who lived in New York, did not.
      4
        For convenience we will treat the acquisition in September 2011 as
petitioner’s acquisition.
      5
        Before sap can be collected from maple trees, the trees have to reach a
certain diameter to ensure the tree can withstand the strain caused by collecting
sap.
                                         -4-

issue. In 2015 he began installing the pipeline and purchasing the equipment

needed to produce syrup from sap. In 2016 he started to modify the barn to house

the equipment. In 2017 he began collecting sap and producing maple syrup. He

sold 18,000 pounds of maple syrup in 2017.

      2.     Petitioner’s Plans To Produce Blueberries

      When petitioner acquired the property, he also decided to produce

blueberries. In 2012 and 2013 he cleared the areas where he planned to plant

blueberry bushes. Petitioner ordered 2,000 blueberry bushes in 2014 and planted

them in 2015. Petitioner had not harvested any blueberries as of the time of trial.

B.    Petitioner’s 2012 and 2013 Tax Returns

      Petitioner timely filed his Forms 1040, U.S. Individual Income Tax Return,

for 2012 and 2013. On petitioner’s Schedule F, Profit or Loss From Farming, for

2012 he reported $201,881 in total expenses (including $162,958 for repairs and

maintenance, $7,454 for taxes, and $6,610 for utilities). On his Schedule F for

2013 petitioner reported $118,503 in expenses (including $71,895 for repairs and

maintenance, $12,029 for taxes, and $8,475 for utilities). Most of petitioner’s

deductions for the years at issue were for the costs of repairs of various buildings,

such as electrical and plumbing repairs, mold removal, window replacements, and

roof work.
                                       -5-

                                    Discussion

      The issue for decision is whether, as petitioner contends, his expenses in

2012 and 2013 to prepare for producing and selling maple syrup and blueberries

are deductible under section 162 as expenses of a trade or business (or section 212

as expenses of an income-producing activity), or, as respondent contends,

nondeductible startup expenses under section 195.

A.    Startup Expenditures

      Petitioner contends that he was cultivating (in this case, thinning) the maple

bush during 2012 and 2013 and that his expenses in 2012 and 2013 were

deductible under section 162 or 212 and were not startup expenses. Respondent

contends that petitioner’s activities during 2012 and 2013 were nondeductible

startup expenses under section 195 and that during those years petitioner had not

yet commenced his trade or businesses of producing maple syrup and blueberries.

We agree with respondent.

      For expenses to be deductible under section 162 or 212, they must be

associated with an active trade or business or other income-producing activity. A

taxpayer may not deduct “start-up” expenses under section 162(a) or 212.

Sec. 195; Toth v. Commissioner, 128 T.C. 1, 4 (2007). Startup expenses are,

among other things, expenses incurred to create an active trade or business.
                                       -6-

Sec. 195(c). The startup phase occurs before business operations have

commenced. McMillan v. Commissioner, T.C. Memo. 2019-108, at *28;

McKelvey v. Commissioner, T.C. Memo. 2002-63, aff’d, 76 F. App’x 806 (9th

Cir. 2003). Expenses are not deductible under section 162 until the business is

actually functioning and performing the activities for which it was organized.

Richmond Television Corp. v. United States, 345 F.2d 901, 907 (4th Cir. 1965),

vacated and remanded on other grounds, 382 U.S. 68 (1965); see also Toth v.

Commissioner, 128 T.C. at 4; Reems v. Commissioner, T.C. Memo. 1994-253,

1994 WL 243475.

         In McKelvey, we disallowed deductions claimed by a taxpayer who bought

land for use as a tree farm but had not yet harvested any trees. In McManus v.

Commissioner, T.C. Memo. 1987-457, aff’d without published opinion, 865 F.2d

255 (4th Cir. 1988), a taxpayer who had purchased various components to use in

manufacturing and selling mud logging devices was not engaged in a trade or

business because none of the mud logging devices had become operational. In

neither of those cases had the taxpayer performed the activity for which the

business was organized. Thus, neither activity had advanced beyond the startup

phase.
                                        -7-

      Preparing a property to produce a commodity (such as maple syrup or

blueberries) is not a trade or business or income-producing activity before sap is

collected or blueberry bushes are planted. The facts in Reems are analogous to

those present here. In Reems a taxpayer purchased land to start a logging

business. After the taxpayer acquired the property he began to clear, repair, and

build logging roads and to sell small batches of firewood, trees, and plants. Reems

v. Commissioner, 1994 WL 243475, at *3. The costs of those activities during the

years at issue were startup expenses in part because the taxpayer did not log any

trees during the year at issue. Id. at *3-*4. In Heinbockel v. Commissioner, T.C.

Memo. 2013-125, we held the taxpayers had not begun their vineyard business

because they had not planted any vines. Petitioner did not plant any blueberry

bushes before or during the years at issue. His costs of land clearing were startup

expenditures.

      Petitioner’s activities performed during 2012 and 2013 were incurred to

prepare the farm to produce sap and plant blueberries. Those are startup expenses

under section 195 and may not be deducted under section 162 or 212.

B.    Petitioner’s Contentions

      Petitioner contends that thinning a maple bush on his land is a section 162

or 212 active business activity. Petitioner argues that a taxpayer is in the business
                                         -8-

of farming if he or she cultivates orchards or groves and that thinning a maple

bush on his land is cultivation. Petitioner cites Internal Revenue Service

Publication 225, Farmer’s Tax Guide. The first sentence of the publication during

the years at issue stated: “[Y]ou are in the business of farming if you cultivate,

operate, or manage a farm for profit either as owner or tenant.” Similarly, we have

said that a taxpayer not cultivating crops was not in a farming business. See

Vianello v. Commissioner, T.C. Memo. 2010-17, 2010 WL 342905, at *7. Those

appearances of the word “cultivate” are consistent with the other cases cited

herein. That is, while cultivation of plants is an essential part of a trade or

business involving production of commodities from those crops, cultivation,

without more, is not sufficient to show that the activity has progressed past the

startup phase.

      Petitioner asserts that thinning a maple bush is a generally accepted industry

practice. We accept that point, but following industry practice does not establish

that an activity has progressed beyond the startup phase. Walsh v. Commissioner,

T.C. Memo. 1988-242 (finding that the taxpayers were following industry practice

for restaurants when they signed a lease and purchased assets to use in the

restaurant, but they were still in the startup phase because they had not yet opened

to the public), aff’d, 884 F.2d 1393 (6th Cir. 1989).
                                        -9-

      Petitioner cites Toth v. Commissioner, 128 T.C. 1, Jackson v.

Commissioner, 864 F.2d 1521 (10th Cir. 1989), aff’g 86 T.C. 492 (1986), and

Blitzer v. Commissioner, 231 Ct. Cl. 236 (1982), in support of the proposition that

revenue is not required for a business to leave the startup phase and enter the

active phase. We agree. During the years at issue, however, petitioner had not

collected sap, installed any of the infrastructure needed to convert sap into syrup,

or purchased any blueberry bushes. Many other steps remained in order for

petitioner to complete the startup phase and collect revenues from maple syrup and

blueberry production.

C.    Conclusion

      Petitioner’s expenses during 2012 and 2013 were startup expenses in

preparation for producing maple syrup and blueberries under section 195 and are

not deductible under section 162 or 212.

      To reflect the foregoing,


                                              Decision will be entered for

                                       respondent.
