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.