John Gallo - Page 10

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          business.  As a threshold matter, this section requires that a              
          taxpayer incur the expenses in “carrying on” a trade or business.           
          Sec. 162(a).  Whether petitioner is engaged in a trade or                   
          business and the nature of that trade or business are questions             
          of fact.  Ford v. Commissioner, 56 T.C. 1300, 1307 (1971), affd.            
          per curiam 487 F.2d 1025 (9th Cir. 1973).  The temporary                    
          cessation of a trade or business does not preclude a finding that           
          a taxpayer was carrying on a trade or business during the period            
          of cessation.  Haft v. Commissioner, 40 T.C. 2, 6 (1963).  Thus,            
          even an unemployed taxpayer may be considered to be carrying on a           
          trade or business if the taxpayer was previously involved in and            
          intended to return to a particular trade or business.  Id.  In              
          order to take advantage of what is described as the “hiatus                 
          principle”, a taxpayer must show that during the hiatus he                  
          intended to resume the same trade or business.  See Estate of               
          Rockefeller v. Commissioner, 762 F.2d 264, 270 (2d Cir. 1985)               
          (citing Sherman v. Commissioner, T.C. Memo. 1977-301), affg. 83             
          T.C. 368 (1984).  In Haft v. Commissioner, supra at 6, we stated            
          as follows:                                                                 
                    Plainly, petitioner did not cease to be in the                    
               costume jewelry business in 1957 and 1958 merely                       
               because he temporarily had no merchandise to sell.  It                 
               was a period of transition in which he was actively                    
               seeking another connection that would enable him to                    
               continue to serve the same customers with whom he had                  
               previously dealt.  We think that the respondent’s                      
               position that petitioner was not carrying on a trade or                
               business in these circumstances gives an unduly narrow                 
               interpretation to the statute.  His failure to make                    

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