In Uncategorized on 03/28/2016 at 16:44

Today’s offering, taken, if not ripped, from the Tax Court headlines, concerns Thomas L. Ryther, 2016 T. C. Memo. 56, filed 3/28/16.

And if you’re wondering why I’m not dealing with the 47 pages of Judge Laro’s deconstruction of John J. Machacek, Jr. and Marianne Machacek, 2016 T. C. 55, filed 3/28/16, it’s just a variation on Our Country Home Enterprises, Inc., 145 T. C. 1, and I dealt with that in my blogpost “Splitsville,” 7/13/15. If there’s anything new today, it’s Judge Laro marrying the SDLIA with deferred compensation (Section 83). And as these SDLIA deals have been blown sky-high so many times, it’s not likely any of my readers will encounter any new ones.

I know, I know…I’m a big fan of The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Impenetrable, Implacable, Illustrious, Industrious, Indefatigable, Ineffable, Ineluctable, Incontrovertible and Indomitable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes. Honest, I didn’t choose Tom ahead of the Machaceks because of Judge Holmes’ prose…well, not entirely.

But you should read this one, because it’s got a lot of good stuff on trade or business vs. liquidation of investment. Plenty of stuff for your trial briefs and summary J motions.

And of course we have Judge Holmes up to his old tricks: “In winding up Knight Steel’s operations, the trustee focused on the company’s cash and accounts receivable and chose to abandon the company’s few items of tangible property–a couple run-down trailers, some well-used fabrication equipment, and a large pile of scrap steel–because they appeared to be worthless.” 2016 T. C. Memo. 56, at pp. 2-3.

Hey Judge, here in the Apple it’s almost 4:30 p.m. as I write this: time for a cup tea and a piece cake?

Back to business. Tom was honcho of the aforementioned Knight Steel, and the post-Chapter owner of the aforementioned “couple run-down trailers” and the large pile of scrap steel.

Tom, needing cash and having apparently worthless stuff the Ch 7 trustee had scorned, discovered there was gold in that thar large pile. So he unloaded the scrap steel over seven years, never selling more than enough to raise cash to live on. And Tom dealt only in what certain former clients of mine, distinguishable by their distinctive dress, called “blätter.”  Incidentally, Tom also didn’t bother to file income tax returns for the seven (count ‘em, seven) years he was unloading, but came clean thereafter. Whereupon IRS hit him with a SNOD for SE tax, claiming he was in the scrap selling business.

No he wasn’t said Judge Holmes. And Judge Holmes, like a master cat herder, pores through a bushelbasketful of cases, which go in all directions.

While the scrap might have been stock-in-trade for the defunct Knight Steel, some caselaw from the estate tax side says that it might be a capital asset when it gets to Tom. And the day-trader and gambler cases say that even a lot of activity might not put you into a trade or business. True, you don’t have to advertise to sell scrap; there are apparently published pricelists and wide-ranging buyers who solicit sellers of scrap. But there’s no processing involved on the seller’s side, unlike the photo operation that scavenged waste silver from its developing vats, turned around and sold it.

So while a lot of the seven factors, and the three subsidiary factors, are neutral, on the facts Tom was liquidating an investment.

And size doesn’t matter. Big-ticket sales don’t put the seller into a trade or business. An art dealer selling off his personal collection got capital gains in one case.

And the number of years engaged in selling isn’t always dispositive. It was in the case of a seller of classic cars, but those are often held because their value appreciates with time, and such cars often need lengthy and extensive restoration. So the classic car dude was in a trade or business. But Tom’s scrap remained scrap and just sat there. Rusting, probably.

And my coop and condo converter clients might find solace in this tidbit: “We find this factor favors Ryther–that he decided to sell the scrap slowly over time instead of in one lump doesn’t make the sales a business, any more than liquidating a block of duplexes in a string of sales instead of all at once makes it a business.  See Heller Trust v. Commissioner, 382 F.2d 675 (9th Cir. 1967), rev’g T.C. Memo. 1965-302.).” 2016 T. C. Memo. 56, at p. 15.

Good stuff here, despite the “couple run down trailers.”


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