The Tax Adviser author bases that on
the Toth case. Toth is an interesting case, because, nowadays, most of us would look at the regular and continuous involvement and intent to make a profit and call it a trade or business. Nonetheless, the parties agreed that this was a section 212 activity. Since this was a section 212 activity, the Service contended that because the taxpayer intended to have a section 162 trade or business later, all of her 2004 costs would be capitalized under section 195. In other words, they read, "(iii) any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business," quite literally. And the Service lost.
The Tax Court explained:
Once her section 212 activity has begun, the deduction of ordinary and necessary expenses paid or incurred in that activity is not precluded by section 195 regardless of whether that activity is subsequently transformed into a trade or business. This interpretation is consistent with section 195 and its legislative history.
What it comes down to is that the courts have repeatedly said that section 212 and section 162 activities are on equal footing. The full Tax Court in Toth said it best: "The purpose of the 1984 amendment to section 195 was to bring sections 212 and 162 into parity when determining whether an expenditure has been incurred in a startup activity." If they are on equal footing, expenses related to section 212 activities get capitalized under section 195 during the start-up phase. Expenses after the section 212 activity commences are deductible. This is Toth's holding.
(It is important to note that section 195(c)(1)(B) applies only to costs that would otherwise be deductible. We can't use section 195 to get around the suspended miscellaneous itemized deductions, except to the extent that section 62(a)(4) permits.)