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IRS Court Victory in Capital Gains Case May Help More Taxpayers Than it Hurts

February 10, 2016 Business & Tax Blog Capital Gain Transactions

Most capital asset classification cases involve the IRS denying lower-tax-rate capital gain treatment. Many of these cases turn on whether a taxpayer’s activities relating to the asset were minor enough to avoid becoming an active “business” rather than a more passive activity.

A recent case turned that pattern on its head, with a taxpayer claiming a real estate asset he intended to redevelop was a business asset, not a capital asset, so he could deduct a loss on its sale against other ordinary income. The IRS argued the taxpayer didn’t sell real estate frequently enough to make his activity a business. The IRS further argued the loss should be a capital loss that is not deductible against other ordinary income.

The Tax Court agreed with the IRS. In its opinion, notwithstanding the taxpayer’s primary occupation as an employee of a real estate development company, the Tax Court ignored the possibility that the taxpayer could be in the business of developing property himself. The court instead focused solely upon whether he frequently personally purchased and sold property.

The taxpayer’s infrequent personal real estate dealings helped the IRS disallow a loss in this case; however, the Tax Court’s reasoning could be beneficial to other taxpayers with gains. For example, it could help persons who occasionally develop property—such as a spec home–as a non-primary activity in claiming lower-tax-rate capital gain treatment. In the end, more taxpayers may benefit from this decision than are hurt.

Here is a link to the Tax Court’s Memorandum Opinion in Evans:

E. John Wagner, II