Morton Frank v. Commissioner
20 T.C. 511 (Tax Ct. 1953)

  • Frank and his wife decided to buy a newspaper business. They drove all around the US looking for just the right newspaper business to buy, and eventually bought one in Canton, Ohio.
  • The Franks deducted the costs of all that travel as a business expense from their taxes.
    • The Franks used the standard legal allowances for business travel in calculating their expenses.
  • The IRS denied the deduction. The Franks appealed.
  • The Tax Court affirmed.
    • The Tax Court found that the trips the Franks made were not related to the conduct of the business that they were then engaged in, but were preparatory to locating a business venture of their own.
    • The Court found that preparatory expenses are not deductible as business expenses under 23(a) of the Tax Code (now 26 U.S.C. 162(a)).
      • Specifically 23(a) (and now 162(a)) allow deductions for costs incurred "in carrying on any trade or business..." The Court found that you couldn't be 'carrying on' a business until you actually had a business.
    • The Court found that the Franks' costs were more like a capital expenditure since they were spending money to improve their (presently nonexistent) business, they weren't looking to maintain a current business.
    • The Franks argued that they could deduct expenses for the conservation of income-producing property, which would be deductible under 212, but the Court found that the expenses were incurred before they had any property to conserve.
      • The Franks argued that the first step to conserving property was acquiring it, but that argument was unsuccessful.
    • The Franks argued that they could deduct their expenses as a loss on a transaction, which would be deductible under 165, but the Court found that most of the expenses were not related to the eventual transaction, so they were not deductible.
  • Since this case was decided, Congress passed 195, which allows for some deductions for startup expenses.
    • But it's a more limited deduction. Under 195(a) a taxpayer can only deduct up to $5k the year a business opens, and must amortize the remaining expenses over the next 15 years.