good morning counsel and you may proceed tax statutes at issue that tax court found that a forty year veteran of the real estate industry and the ultimate developer of the properties that you see should be treated no differently then a stock broker or a surgeon for tax purposes buying their st piece of undeveloped land and by making such holding the court wiped out all of this forty year tax or forty year real estate veterans tax law all their losses removed all this business expenses and all because he couldn't sell enough property or subdivide enough property during the most devastating financial times of his life and the court did this at a time where they were aware and even in the trade been in the opinion state that mr eight hundred and sixty lot under contract for west holland which is here which he developed all that is in color but eight hundred and sixty homesite on lake lanier eight age restrictive they still found that he has to be treated like a surgeon and a stockbroker with their st piece of land with that i have a few comments that i would like to make some brief independent points and and hopefully i'll be able to get to to each of them in develop it did well it just simply means you're going to build for that year and so therefore you get a forty percent value reduction for that year and then once it's developed you do incur the the penalty in the back taxes  you split that with the buyer just like here this is the property you're talking about west it was under this conservation use it was under contract for that's lake lanier it was under contract and to any sixteen which shows his intent never changed this was simply a matter of how can i save money during this horrible horrible financial time let me ask you a question you would agree would it not that the tax course determination that connor could not to block the expenses of the analysis business expenses because he concluded that expenses were properly characterized as investment expenses that's a finding of fact  the extent that these are the underlying facts found by the tax court that they were found in a manner that was clearly erroneous even if i would have looked at the facts and reached a different determination and you lose unless you can show that that court's determination what's clearly erroneous so to ok so one the facts are not really in dispute the facts are not in dispute and we are talking about the interpretation of the phrase trade or business under one second section one hundred and sixty k so you're saying  in law and on that score and also here the tax would misapplied the trade or business test which would be another to know but review why because sales are not required to have a real estate trader business under the us supreme court authority under grossinger all instead all you need to have a regular continuous activities and i will tell you the tax court using this theory of you need sales to be a real estate trader business what they do is they they took it from a nother case which is your winthrop factors which doesn't deal with the day to day expenses that deals with the sale of a capital asset why is that dangerous because these cases that talk about sales and how many sales you have to have they were doing with eighty thousand nine hundred acre tracks in atlanta miami other large cities we don't have those size tracks anymore tis a dangerous proposition so one grossinger only required that mr connor which the facts are in in the record and we we don't dispute any of them is that mr connor did development activities every year that would rise to the level of a trade or business and even to show where i believe the tax court really got shot ways in this one is is an easy one to resolve is the tax court continued to say that mr connor was in the exploratory stages in the beginning stages this court has already put an end to that issue when they reversed the tax court in  basically said if you get so we wanted one hundred and sixty two dollars deductions which are business expenses the the i r s gave us in the notice and the tax court agreed to twelve investment expenses so relf from this court said we're going to read those together and you are a soon to already be in the activity so to use judge market your language from the last case this issue is dead as far as the exploratory aspects of the tax court opinion as well as the i r s brief those parts that's a dead issue because of this court's opinion in surat next we go to the actual cell of the lake lanier property at a two million dollar loss the tax court found if that doesn't show why he didn't sell a lot of land i don't know what does but what happened there you have the winthrop factors that that were passed that the fist circuit said to to apply but they said it's a facts and circumstances situation the tax court did a quasi bright line approach and said no you have sales or you subdivide then you if you don't do those you lose which ignores the whole facts and circumstances test under under went through up as well as any of the president the the now point i want to move on to is that there's been no case like this think about this is a forty year real estate veteran and there's been never a case where the t brought it much less as a court found that somebody must take one just sample lot i'm just trying to work through this if you take shoreline and i do look at sales there and they said they had a single sale over eight the things you have to do he had to go to the board the local county boards and get all of this for it which he did but to but it is that undisputed fact indicative of maybe it was for investment no your honor because he actually had the development plans and got it approved for a ninety four dollars lots to be subdivided but unfortunately by the time that was done was two thousand and nine which were right in the middle of the recession so then all the continue to do was sort of the tax court says from two thousand and seven to turning thirteen the position did nothing to further development it just sat there is that that timeline correct that is not correct your honor it instead they what he tried to do was the bank said we're going to take this property from you so he continued to draw different plans from a ninety four homesites down to twenty down to sixteen any tried every way to get the bank to finance the actual development that they actually moving of the dirt and he could never get their funds because they couldn't get financing there was no development during two lesser amounts but he also continued so drawing a different plans which he did and then to he did the boat docks who went to the community went to the corps of engineers but i think that the most important thing to look at is once he was forced to sell it by the bank and the tax court agrees with that fact he sold it for a two million dollars loss so if there there is no facts and circumstances test that would be letting the tax tail wag the dog you have to sell real estate person your property at millions of dollars of losses to show you're actually in the real estate business that's an unfair test i see that i meant that thanks much and you've reserved to your full five minutes good morning mr gordon your honour's may please the court randolph better for the commissioner what you tell me at the outset so i read the tax court opinion what are the critical facts that are not in dispute and the mix question is that we really don't know as you see it well i believe that this is basically a factual question and the court found in particular well you start off with the requirement for what is a trade or business a trade or business must be an activity that isn't is a going concern functioning as a business and carrying out the pick a purpose for which it was designed and the facts do not support that the l l season issue here were trade or business they may have been purchased originally for development purposes but on these properties no development no dirt thirteen with no development going on there may have been plans to develop these lands but it's not clear exactly ok so those are underlying building blocks of fact which we were only for clear era that's clear right yes your honor then when the tax court makes the determination that karma could not to dock the expenses of the hello see as business expenses because they were properly characterized as investment expenses you would agree i take it that that's a mixed question of law and fact that we were you do know that determination yes you're ok yes you're right and the tax court correctly found that the facts did not show tax court that the recession is irrelevant because no trade or business ever got off the ground there are cases that show that economic situations can stop a trader business from going on so we would look at that question for abuse of discretion was two thousand and eight then nothing happened again ever we would say that that is the the that particular property then at that time was not held for any kind of development because a trade or business wasn't going on if the same facts remain true he didn't develop any more he didn't move any dirt he didn't advertise he didn't meet with buyers etc etc so what he did do some things he did do some things and then he stopped he did do some things at the beginning he apparently got some plans together then he had ideas but i don't think that he ever got something going that you would call a trade or business because a trade or business require some selling going on and some profit to go on and it stopped it may have stopped largely because of the recession but it stopped and so at the time you look at the property at the time and what it was doing during the tax years that issue and development had ceased had never really started and no trade or business had ever such as such as charting out the lots that are going to be subdivided and moving some dirt and planning those of the start up and the well he says that because there was no market at the time i couldn't get the banks to finance the infrastructure costs yes so he's we're basically holding this property waiting for a better market to come along that's the kind of the definition of investment property and we do have i do have a question  disputed with his comment about the conservancy program i believe there's evidence in the record although i don't quite can't put my finger on it right this moment but i also looked at the website for the georgia department of resources and a conservancy program outlined there was a ten year program it's not just do it on a one year program and then you get lower taxes and then you can do whatever you want the next you know you agree for ten years not to do anything with this program and if you ever do development stead then you pay as the website says you're pay or rather hefty price you have to pay your tax games back and and i think maybe twice what you've you've gained in tax from the state revenue capitalized we gave that argument to the tax court as an alternative we said tax court these are either expenses tied with investment property or at best they are expenses in the beginning of a trade or business that have to be capitalized the tax court did not follow our nd argument it said you're right their investment expenses because this property was held for investment so the tax code did not rely on the idea that these were exit a exploratory and  start up expenses were also not wiping out all of the tax payers losses he's got a big business he has a whole nother corporation he's got other tax treatment of those profits and expenses it's a  corporation that operates all over this area and twelve or thirteen states in the country those tax issues are not affected these tax issues in this case are not just totally wiped out again they become put on schedule a they're limited and to some extent he may be able to carry forward them to future years they're not just eliminated you can't have these expenses what all their their investment expenses that may be taken up to the extent of investment income there's also the issue of material participation and passive activity the tax court found that well you may remember on the stand vaguely that you spent over one hundred hours a year on each of these l  we're talking about here yes so whether it offset ordinary income yes the owner of the property so he could be making ordinary income from other endeavors yes and this would if it resign as scheduled it offset ordinary income correct and if it was scheduled as expenses for investment that one b n and all offset the offset were now maybe against capital gains later on know it or it would be just tell and off it's just limited on schedule a schedule is a different schedule for investment expenses and other miscellaneous expenses but it has a cap yes well technically it has a floor on schedule it has a two percent floor and you take two percent of adjusted gross income and you can only deduct the expenses other ordinary income is that right listed on that same return yes that's correct well it has to be the same tax payer but it didn't have to be the same endeavor doesn't have to be the same in the entity that's correct you took them up on true there's a two percent floor what does that mean that much come on you take two percent of the adjusted gross income of the taxpayer let's say that adjusted gross income adjusted gross income thousand dollars in one year right two percent of that of course would be twenty two thousand dollars or is that twenty percent twenty percent are you a one hundred dollars or less just do it is ten percent two percent and then you cannot take anything that under the two percent so if you've only got one hundred and fifty dollars in expenses you can't deduct it if you've got two hundred and fifty dollars an expense but can you deduct everything that our the two hundred  so these losses and expenses are not totally limited to the i r s is not saying you never can take any of these you can take some of them it's just just has to be characterized and one reason that this particular case is important is because mr connor has future cases that he may bring and and other dealings that that may impact the future and we want to make sure we get the ducks in order for every tax year that he reports the last issue that of course is judicata from that year when what the commissioner did in that year was stipulate to a decision that he had no liability no deficiency for that year and we argue in the tax court found that there was a race judicata did not apply for one thing because every tax year is a separate cause of action and also because there was a separate stipulation agreement in tw and eleven i take serious dispute with that language the commissioner did not concede that in two thousand and eleven the commissioner stipulated to an agreement to not litigate that case further therefore nothing was litigated nothing was decided and there's  stipulated agreement it's exhibit a to the stipulation of facts and it's included in the excerpts of record and the commissioner solely stipulated to the decision to the amount of tax for that year when we get to tw and the carry forward that he wishes to carry forward that evidence that he has to and a claim for five hundred thousand dollars in carry forward losses that he has to prove up he did not choose to i want to hit st the some of the things that were touched on st you know what if it was a flop i think one thing that is crystal clear and again it's in the record it's undisputed what happened was mr connor's intent was to develop west ho taxes and then pay the penalty for what you've already gotten correct ok so and so now this is under contract closing in july words eight hundred and sixty dollars homesite what happened was because he because of the recession remember simpler was actually in the bill he was going to build a mall here but then unfortunately once that happened and it fell through because of the economy he moved by as not the ten year conservation  program commitment which can be a breach at least some evidence that he had decided to use it as investment property because you're under it whether or not you have it as an investment property is not a year by year issue bori discords this court's decision important is crystal clear what was your original intent i agree is not in year by year that doesn't answer my question i'm saying is that not evidence from what you can infer are that he was crying and had decided to go ahead and just hold it as an investment property now i know he could change his mind why is that not evident of intent in this case it is not evidence of intent because at the same time he did that which the banks demanded him to do so he would reduce his expenses it at the same time he was going before hall county to have this property was doing these two things simultaneously and the record is clear again that he ultimately just by the time of trial had this property under sale one point i want to make sure that we get to is because he couldn't develop this because of the recession he moved down to the green areas which is where it is academy sports and all the shopping centers that you see in green because he learned from the banks that look the only way we're going to give you money for dawsonville highway is for you to become a cluster go down near home depot and build your way which is exactly what happened here is what did it ever get it resound all of that brown yes yes and that is another matter and as well as das a well as hall county making him do it traffic impact study hall county made into a traffic impact study because they said if you develop this there's going to be thirty five thousand cars on this two lane road i want to make sure i hit a couple of points that that we're not have to say we're not correct on the front end st of all the tax court specifically says over and over mr connor was in the explorator dead issue as to your question judge toler regarding investment expenses you are kept i want you to think about one tax return which judge told you mention one tax return on this we've got in brown we've got it investment green on his tax returns trader business green trader business light brown is investment this is because the i r s is saying we're going to do this on annual basis but my final point is this if i come before this panel for this year in a couple of years do you think that the iris is going to say of all of them which sold in the millions was investment and we're going to give you capital gain treatment you know they're going to say you've got sale so we're going to now treat you differently and we're going to treat you differently now which means we gave you no good expenses while you were doing it and we're going to hit you with we're going to we're going to hit you with ordinary income on the back end so we can give you the worst of all worlds as you built this up if you built all this property up you get no business expenses so therefore no no ordinary income expenses but the nd you sell it we're going to say that it's