Research Problem 4. In early 2010, Walter Hodges began investigating the real estate market with the intention of acquiring real estate for investment or rental. He had not previously been involved in any real estate rental or investment ventures.

Walter started marketing his business via business cards, flyers, and word of mouth in spring 2010. At the same time, he completed a business plan for buying, remodeling, and renting property.

In October 2010, Walter paid $25,000 for training classes designed to provide real estate investment skills. He obtained a loan for his business of $45,000 from the U.S.

Small Business Administration in November 2010. During the same month, he obtained an employer ID number from the IRS. In December 2010, he opened a checking account and obtained a credit card in the name of the business.

Walter attempted to purchase several properties during the last half of 2010, but he was unsuccessful until he acquired property on December 30, 2010. He listed the property for rent in early January 2011 and was successful in renting it in March 2011.

On his Form 1040 for 2010, Walter prepared a Schedule C on which he showed a business loss of $29,000. He included the cost of the training classes, automobile expenses, meals and entertainment, computer and software expenses, and supplies.

The IRS has disallowed Walter’s $29,000 deduction on the grounds that he was not yet in a trade or business during 2010. Evaluate the position taken by the IRS.