The Story of a Dealer

No, this blogpost does not concern consumption of, or transactions in, certain vegetation, which aspirants to the office of President of the United States either inhaled or did not inhale.

Rather, at issue here are the FPAAs issued to SI Boo, LLC, Boo Noz Corporation, Tax Matters Partner, et al., 2015 T. C. Memo. 19, filed 2/4/15. Judge Paris upholds IRS’s determination that Boo is a dealer–in real estate.

Boo is a stripminer of tax defaulted properties. Boo’s affiliates buy up certificates issued by municipalities for delinquent taxes, when the municipalities auction them off.

There’s a lengthy how-to explanation in 2015 T. C. Memo. 19, at pp. 4-12. If you want to make money from other people’s misery, and want to do so in Illinois, you can read it.

Boo’s affiliates unload the certificates to Boo, who mostly takes tax deeds after redemption periods end. Boo claims their main business is making money on the interest vig built into their winning bids.

But the vast part of Boo’s income, and the et al’s, comes from sales of properties they thus acquired. After pages of mind-numbing arithmetic, Judge Paris gives us the bottom line–literally the bottom line, as it’s in a footnote.

“Specifically, petitioners made no objection to respondent’s proposed findings of fact that with respect to the entities’ own accounting records of sales by quitclaim deed: in 2007 and 2008 S. I. Securities sold 58% and 50% of its properties within one year of acquisition, respectively; in 2008 Sabre sold 85% of its properties within one year of acquisition; and in 2007 and 2008 SI Boo sold 67% and 90% of its properties within one year of acquisition, respectively.” 2105 T. C. Memo. 19, at p. 27 (Footnote 23).

Boo wanted capital gains and installment sale (Section 453) treatment. No way.

Capital gains are strictly construed. Property held for sale to customers in the ordinary course of a trade or business is not a capital asset and disposition thereof neither results in capital gains treatment nor permits installment sale reporting. And anyone who buys is a customer: no need for repeat business or a regular customer list.

Regular, frequent and substantial selling means you’re in business. Being in business means no installment sale reporting for the goods you sell.

Boo gets smoked.