T.C. Mem o. 2 01 6- 56

UNITED STAT ES TAX COURT THOMAS L. RYTHER, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 17 00 2- 13 . Fi le d M arch 28 , 20 16 . Tho m as L. Ry

th er, p ro se. San dy Hw an g, fo r res po nd en t.

MEMORANDUM OPINION HOLMES, Ju dg e: Whe n h is st eel -fab ric at io n b us in es s d is so lv ed , Tho m as Ryth er fo un d h im se lf l ack in g i nc om e b utinpo ss es si on of alar ge qu an ti ty of sc rap st eel . To rem edy

th e la ckof i nc om e, Ryth er s ol d t he scr ap when ev er h e n eed edto pa y hi s b il ls . Ryth er re po rte d t he sal es as t ax ab le in co m e, bu t the qu es ti on pr es en te d i n t hi s ca se is whet he r he ha d se lf -emp lo ymen t in co m e subjec t t o t he- 2 -

[* 2] Co de ’s sel

f-e mpl oy men t ta x. An d t he an swe r to th is qu es ti on de pe nd s o n whe th er the se sal es am ou nt edto a tr ad e o r bu si ne ss . Bac kg ro un d Ryth er i nc or

po rat edKni gh t St eel inApri l 1 99 7 a ndwas i ts so le own er, of fic er, an d b oa rdm em

be r. The fi rm

fab ric at edst eel fram es , m os tl y forge ne ral co nt ract or s. Th os e co nt ract or s wo ul d b rin g l arg e b eam s t o Ryth er wh ic h h e wou ld cu t t o s iz e an d i n wh ic h h e wou lddri ll bo ltho le s s o tha t the co nt ract or s co ul d eas il y ass em bl e th em in to a fram e ata co ns tru ct io n s it e. Kni gh t St eel ’s fortu ne s s ag ge d a fte r th e st oc k m ark etco ll ap se d i n 2 00 0. In 20 01 itfel l b eh in d o n p ay in g e m pl oym en t t ax es , andth e IRS ass es se d t ru st -fu nd pe na lt ie s ag ai ns t i t. The tro ub le s co nt in ue d, an d i n 2 00 4 ach ap te r 7 b an krup tc y 1 tru st ee t oo k o ve r th e co m pa ny to m an ag e it s l iqui da ti on . The tru st ee cl os edth e bu si ne ss inApri l, an d t he ba nkrupt cy co urt d is ch arg edth e co m pany’ s d eb ts th e fo ll owi ng Jan ua ry . In wi nd in g up Kn ig htSte el ’s op erat io ns , th e trus te e fo cu se d on th e co m

pa ny’ s ca shan d a cco un ts rece iv ab le an d c ho se to ab an do n t he co m pa ny’ s fe w it em s o f ta ng ib le pro pe rty--a co up le run -d owntra il ers , so m e wel l- The IR S as se ss es pe na lt ie s ag ai ns t em pl oyers wh o d on ’t rem itth e ta xe s 1 th ey withh el d fr om

em pl oyees. Th es e p en al ti es are ca ll edtru st -fu ndpe na lt ie s be cau se m on ey

th atem pl oyers wi th ho ldfro m

th ei r worke rs ’ pa y ch eck s i s h el d i n tru stforth e Uni te d S ta te s. See Po ll oc k v . Comm is si on er, 1 32 T.C. 21 , 25 n.1 0 (2 00 9) .- 3 -

[* 3] us edfab ric at io n e qu ip m en t, an d alar ge pi le of s crap st eel --b ecau se th ey ap pe aredto be wort hl es s. Ryth er d id n’t l etth e fai lu re o f Kni gh t St eel si de li ne hi m . Evenbe fo re tha t firm en te redba nkrupt cy , Ryth er h adin co rp or at eda se co ndbu si ne ss , Mis si on St eel . Whe n Kn ig htSte el di ed , Mis si on Ste el to okco nt ro l o f it s ab an do ne d tra il ers an d fabr ic at io n e qu ip m en t an d a ss um edit s l an d l eas es . Ryth er h op edto co nt in ue inth e st eel -fab ric at io n b us in es s, b utth e n ew co m pa ny nev er d idm

uc h bu si ne ss . Ryth er s ti ll ha d b il ls to pa y , so he ne ed edto fin d a no th er s ou rce o f in co m e. He di dn ’t hav e farto lo ok : Th e sc rap st eel was abo utto co m e in ha nd y . Lik e al l fabr ic at io n b us in es se s, Kn ig htSte el ha d g en erat edscr ap . The s crap th atitge ne rat edwas o f subs ta nt ia l s iz e: Som e p ie ces were 4 0 fe etlo ng an d weig he d hun dr ed s o f po un ds . Becau se he ha d n o n eedforitwhen hi s b us in es s was act iv e--e xc ep t fo r ne ed in g i t o utof t he way --Rythe r wou ldjus t l eav e th e sc rap in th e em pt y lo t n ex t t o h is fab ric at io n e qu ip m en t. Ina supe rs iz e v ers io n o f th e br eed in g c ol on ie s o f pape rcl ip s m any off ic e worke rs ke ep inth ei r de skdra wers , Kni gh t St eel ’s scr ap pi le gre w con ti nu al ly from 19 97 to 20 04 . Duri ng all th is ti m e Ryth er was un aware th e sc rap ha d a ny val ue , andhe ne ve r tr ie d t o s el l i t. Bu t i n 20 04 he be he ldth e sc rap pi le an d fabr ic at eda ne w id ea. Aft er d oi ng so m e res earc h, h e d is co ve redth atscr ap ha d n oton ly val ue bu t al so anact iv e m ark et .- 4 -

[* 4] He al so lea rn edth atwho le sa le rs were wi ll in g t o c om e to hi s l ot , fil l the ir tru ck s wi th scr ap st eel , andpay hi m cas h fo r wha t the y

to ok . Over t he ne xtsev en y ears he so ldscr ap st eel on ce o r twi ce a m on th , to at l eas t fi ve di ffer en t s crap 2 who le sa le rs , insal es th atto ta le d o ve r $3 17 ,00 0:

Yea r Recei pts fro m scr ap sa le s 3 20 04 $4 0,3 67 20 05 26 ,04 6 20 06 45 ,75 7 20 07 60 ,58 4 20 08 60 ,44 0 20 09 55 ,74 0 20 10 29 ,83 8 Ryth er d id n’t fi le tax returns durin g t he se y ears . In Fe bruary 20 12 he un ti m el y fil edall sev enm is si ng returns , andrep orte d h is scr ap sal es as m is cel la ne ou s i nc om e. InApri l 2 01 3 t he Co m m is si on er s en t h im

a no ti ce o f de fic ie nc y

an d d et erm in edth atRyth er’s s al es were a t rad e o r bu si ne ss an d h is in co m e fro m

th os e sa le s was th eref

or e subjec t t o s el f-em

pl oym en t t ax . In t he in te res t o f av oi di ng th e IRS , Ryth er d eal t s ol el y incas h a nddi dn ’t 2 wan t m or e cas h o n h an d t han h e n eed edto pa y hi s m on th ly exp en se s. Ryth er k ep t n o re co rd s, b utth e p art ie s s ti pu la te d t he se am ou nt s b as edon 3 hi s p ers on al ex pe ns es foreach y ear.- 5 -

[* 5] Ryth er, a Ca li fo rn iares id en t, fi le d ati m el y pe ti ti on . The o nl y

is su e we h av e to de ci de is whet he r hi s i nc om e fro m th e sc rap -m et al sal es is subjec t t o s el fem pl oym en t t ax . The p art ie s ag reedth atth ey ne ed edno tri al an d s ub m it te d t he cas e u nd er Ru le 12 2. 4 Dis cu ss io n W e b eg in with t he Co de . Sect io n 1 40 1 i m po se s a t ax on “ se lf- em

pl oym en t in co m e.” Sec ti on 14 02 de fin es sel f-em pl oym en t i nc om e as “ ne t ea rn in gs fro m se lf- em pl oym en t” whi ch itde fin es as “ th e g ro ss in co m e d eri ve d b y anin di vi du al fro m an y tra de or b us in es s ca rri edon by suc h i nd iv idua l.” Se c. 14 02 (a) a nd(b) . Sect io n 1 40 2( c) t el ls us th atth e p hr as e “ tra de or b us in es s” m ean s t he same in se ct io n 1 40 2 a s i t d oe s i n s ect io n 1 62 . Sect io n 1 62 , ho wev er, i s a d eaden d. Nowh ere i n t ha t s ect io n- -o r an ywhe re el se --d oe s the Co de de fin e “ tra de or bu si ne ss .” The Supr em e Co urt l on g a go for ge d apl ug forth is gap a ndde fin eda

5 tra de or b us in es s as anact iv it y en ga ge d i n fo r in co m e o r pr of itan d p erfo rm edwith co nt in ui ty andreg ul ari ty. Co m m is si on er v . Groe tz in ge r, 48 0 U.S. 2 3, 3 5 (1 98 7) . All sec ti on refe ren ces are t o t he Int ern al Rev enue Co de ineffe ctforth e 4 y ears at i ss ue an d a ll Ru le refe ren ces are t o t he Tax C ou rt Rul es of P ract ic e an d Pro cedur e. The C od e u se s t he ph ras e “ tra de or b us in es s” inat l eas t 8 00 subs ect io ns , 5 bu t n ev er d efi ne s i t. Co m m is si on er v . Groe tz in ge r, 48 0 U.S. 2 3, 2 7 (1 98 7) .- 6 -

[* 6] Oth er ca se s t el l u s t ha t wh ethe r anact iv it y is a tr ad e o r bu si ne ss is a qu es ti on of fact . Whi tn ey

v. Co m m is si on er, T.C. Mem o. 1 99 0- 16 3; see als o Hi gg in s v . Co m m is si on er, 3 12 U.S. 21 2, 2 17 (19 41 ). Bo th pa rti es th us co rrec tl y foc us on th e fac tu al qu es ti on of wh ethe r Ryth er’s act iv ity was atra de or b us in es s. An d we wo n’t p ret en d t he qu es ti on is aneas y on e--c as es canbe fou ndth atsupp ort ea ch of t he pa rti es . W e th in k, h owe ve r, th at 6 th e so lu ti on is a bi t cl eare r if we be gi n wi th th e p ro pe rty tha t Ryth er s ol d ra th er th anho w oft enhe so ldit . Sect io n 1 40 2( a)(3 )(C) ex em pt s t he sal e o f a t ax pay er’s own pro pe rty from

th e d efi ni ti onof “ se lf e m pl oym en t i nc om e.” Bu t the re ar e two bi g e xc ep ti on s. Th e fi rs t i s fo r th e sa le of p ro pe rty tha t i s t he “ st oc k i n t rad e o r ot he r pr op erty

of aki ndwhi ch wou ldpro pe rly be i nc lu di bl e in in ve nt ory if o n ha ndat the clo se of t he tax ab le y ear.” Sec. 1 40 2( a)(3 )(C) (i) . The s eco ndis forth e sa le of “ pr op erty

he ldpri m ari ly for s al e to cu st om ers inth e o rd in ary co ur se of t he tra de or b us in es s.” Id . cl. (i i). In ot he r wor ds , th e Co m m is si on er wi ns if Ryth er’s sc rap sal es fal l wi th in eit he r ex cep ti on ; Ryth er wi ns if t he y do n’t.

Co m pa re Has ti ng s v . Comm is si on er, T.C. Mem o. 2 00 9- 69 , sl ip op . at 9 6 (g am bl in g n ota tr ad e o r bu si ne ss ev enth ou gh tax pa y er g am bl edvi rtu al ly every week en d a ndho li da y), with B as ad a v . Comm is si on er, T.C. Mem o. 1 99 8- 14 4, s li p op . at 3 (fi nd in g t ha t t ax pa y er’s “ st reet -h us tl in g” is bu si ne ss , eve n abs en t ev id en ce of ti m e sp en t h us tl in g) .- 7 -

[* 7] Pro pe rty hel d a s “ in ve nt ory ” an d p ro pe rty “pr im ari ly hel d fo r sa le inth e or di na ry co ur se of atra de or b us in es s” ov erl ap inm an y si tu at io ns . A retai le r, fo r ex am pl e, m ig htsel l a n um

be r of di ffer en t t oys. Thes e to y s ar e b ot h i n h is in ve nt ory an d h el d p rimaril y

for sal e to cu st om ers inth e o rd in ary co ur se of bu si ne ss . Butin ve nt ory

is a br oa de r co nc ep t an d i nc lu de s m an y it em s n othe ldfor sa le . A car m anuf

actur er, fo r ex am

pl e, ke ep s m an y

di ffer en t au to parts on ha nd . The se pa rts are al so in ve nt ory , bu t ar e h el d fo r as se m bl y in to a car a ndno t pr im ari ly for s al e in th e o rd in ary co ur se of t he co m pa ny’ s b us in es s. We do n’t ha ve to pl um

b t he hi dd ende pths of t hi s d is ti nc ti on he re, tho ug h, b ecau se th e pa rti es ag ree t ha t Ryth er was do in g n ot hi ng to hi s s crap bu t s el li ng it . For t hi s reas on , we nee d o nl y

de ci de if Ryth er h el d t he m et al pri m ari ly for s al e inth e or di na ry co ur se of atra de or b us in es s. Yet h ere a ga in we se em

to run in to an ot he r st atut ory de aden d. Se ct io n 14 02 do es n’t d efi ne th e te rm “pr op erty

he ldpri m ari ly for s al e to cu st om ers inth e or di na ry co ur se of t he tra de or b us in es s.” Th e reg ul at io ns un de r se ct io n 1 40 2 a re si m il arl y si le nt . Butth e Co de do es ha ve a whi sp er o f a cl ue --b oth p hr as es als o ap pe ar i n s ect io n 1 22 1( a)(1 ), whi ch de fin es whatpro pe rty isn ’t con si de reda cap it al ass et . Alth ou gh sec ti on 12 21 do es n’t d efi ne th es e te rm s ei th er, the re’s cas el aw un de r th atsec ti onan d we c anlo okto itto he lp us so lv e th e m y st ery- 8 -

[* 8] be fo re u s. See , e.g., Parks id e, In c. v. Co m m is si on er, 5 71 F.2d10 92 , 10 94 (9 th Cir . 19 77 ) (u si ng sec ti on12 21 (1 ) to he lp co ns tru e th e m ean in g o f se ct io n 54 3( b) (3 )), rev ’g T.C. Mem o. 1 97 5- 14 ; Si Bo o, LLC v . Comm is si on er, T.C. Mem o. 2 01 5- 19 (de ci di ng th atth e sa le of r eal est at e was subjec t t o s el fem pl oym en t t ax fora pa rtn ers hi p a fte r fi rs t d et erm in in g t he real pro pe rty was n ota cap it al ass etun de r se ct io n 1 22 1) ; Gar dn er v . Comm is si on er, T.C. Mem o. 2 01 1- 13 7, s li p o p. at6 (d et erm in in g i f th e ta xp ay er’s act iv it ie s fe ll withi n t he m ean in g of sec ti on 12 21 (a)( 1) an d n ot in g t ha t, i f th ey di d, the “pr in ci pa l n eg at iv e co ns eque nc e to [th e ta xp ay er] app ears to be anin crea se inhi s n etearn in gs fro m se lf- em pl oym en t an d t he im

po si ti on of asel f-em

pl oym en t t ax ”). Dis ti ng ui sh in g c ap it al fro m no nc ap it al ass et s ca n b e tr ic ky, andth e que st io n is im po rta ntinm os t ca se s b ecau se th e ta x t reatm en t o f cap it al in co m e canbe so di ffer en t fr om

th atof o rd in ary in co m e. Nothe re: W e are n’t as ke d t o c on si de r whe th er Rythe r’s ga in fro m th e sa le of s crap was c ap it al or o rd in ary, bu t o nl y whe th er i ts real iz at io n re qu ire s p aym en t o f se lf- em pl oym en t t ax . The l an gu ag e in

7 One m ig htwon de r why Ryth er d id n’t h av e to in cl ud e th e v al ue of t he 7 sc rap inhi s t ax ab le in co m e fo r th e y ear h e to okpo ss es si onof i t. Ma y be th e ri gh t tre atm en t o f th e sc rap was a s t reas ur e tr ov e to Ryth er o n t he da y itwas “ reduc edto un di sp ut edpo ss es si on .” See R ev . Rul . 61 , 19 53 -1 C.B. 1 7. Th e am ou ntof t he in co m e o n t ha t d ay

wou ldbe m eas ur edby som e cal cu la ti on of “ it s v al ue inUni te d St at es cu rren cy .” Id . After t ha t, Rythe r wou ld ’ve h ada ba si s i n t he scr ap equa l t o (co nt in ue d...)- 9 -

[* 9] se ct io n 1 40 2 andsec ti on 12 21 (a)( 1) is id en ti cal , andwe th in k the cas es ex pl ai ni ng sec ti on 12 21 (a)( 1) are ex cep ti on al ly relev an t. 8 Andth is m ean s we h av e to sh iftour fo cu s t o fi ne art . In Will ifo rdv. Co m m is si on er, T.C. Mem o. 1 99 2- 45 0, 1 99 2 WL 18 88 95 , a tax pa y er wh o s ol d pi eces of a rt wa s a p art -ti m e artde al er b utcla im edth athi s i nc om e fro m th e sa le of pa rti cu la r pi eces at i ss ue inhi s ca se was c ap it al ga in be cau se th ey were fro m

hi s pe rs on al co ll ect io n. We hadto de ci de if t he se pa rti cu la r pi eces were “ he ld pr im ari ly for s al e to cu st om ers in th e o rd in ary co ur se of atra de or b us in es s” or i f th ey were p ro pe rty hel d a s anin ve st m en t. We us edth e fo ll owi ng fact or s:

• freque nc y

an d re gu la rit y

of s al es ;

• subs ta nt ia li ty of sa le s; (...co nt inue d) 7 th e am ou ntof t he in co m e. His futur e sc rap sal es wou ldth enha ve am ou nt edto a reco ve ry of b as is (pl us pe rh ap s a l it tl e g ai n i f th e p ric e o f sc rap ha d i nc reas ed si nc e th e d at e h e fo un d i t) i ns te adof o rd in ary in co m e. Neit he r pa rty rais edth e is su e, ho wev er, an d we d on ’t nee d t o c on si de r itfurth er. Sect io n 1 .14 02 (a)- 6, In co m e Tax Reg s., t el ls us no t t o wo rry ab ou t the 8 ch arac te r of

an y ga inor l os s. Itno te s t ha t wh enin co m e is ex cl ud edfro m sel fem pl oym en t i nc om e b ecau se it ’s a di sp os it io n o f pr op erty th atis n’t i nv en to ry

or pr op erty pri m ari ly hel d fo r sa le to cu st om ers , “ itis imm at eri al whet he r a g ai n o r lo ss is tre at edas acap it al ga inor l os s o r as anord in ary ga in or l os s fo r pu rp os es ot he r th ande te rm in in g n etearn in gs fro m sel f-em pl oym en t.” Id . par a. (a). An d ev enif the scr ap were a capi ta l as se t, p ro ceed s fr om it s d is po si ti on wou ldst il l n ot be earn in gs fro m

sel f-em pl oym en t. Sec . 14 02 (a)( 3) (A).- 10 -

[* 10 ] • le ng th of t im e th e p ro pe rty was h el d;

• se gr eg at io n o f pr op erty fro m bu si ne ss pro pe rty;

• pu rp os e o f acqui si ti on ;

• sa le s an d a dv ert is in g e ffo rt;

• ti m e an d e ffo rt s pe nton sal es ; an d

• ho w th e p ro ceed s o f th e sa le s wer e u se d. Id . at * 4. W e d o t he same for Rythe r’s sa le of s crap , andwil l l oo k a t ea ch of t he se ei gh t fa ct or s i nd iv idua ll y . W e al so un de rs tandth atwhen ev er a co urt u se s a m ul ti fact or tes t, i t s ho ul d b e cau ti ou s i n n otlet ti ng a fi nd in g t ha t s om e fac to rs po in t o ne way an d s om e p oi ntth e o th er b eco m e anex cu se forun co ns tra in eddi sc ret io n. Mu lt ifa ct ortes ts are s ui tabl y ob jecti ve on ly whe n e ach fact or he lp s t o g etan an swe r to a co m

m on qu es ti on , andth atqu es ti on ina cas e li ke Ryth er’s i s wh ethe r he he ldhi s s crap “pr im ari ly for s al e to cu st om ers inth e o rd in ary co ur se of atra de orbu si ne ss .” Uni te d S ta te s v . W in th ro p, 4 17 F.2d90 5, 9 10 (5t h C ir. 1 96 9) . And th is lea ds us to an ot he r m ul ti fact oran al y si s. So m e o f th e cas es tel l u s t ha t the re are t hr ee que st io ns a co urt m us t as k i n acas e li ke th is :

• is th e ta xp ay er en ga ge d i n atra de or b us in es s?

• is he ho ld in g t he pro pe rty pri m ari ly for s al e in th atbu si ne ss ?- 11 -

[* 11 ] • were t he sal es “ or di na ry ” in th e co ur se of tha t b us in es s? Pau ll us v. Co m

m is si on er, T.C. Mem o. 1 99 6- 41 9. Th e Nin th Cir cu itlo ng ag o t ol d us th atth e p hr as es “ tra de or b us in es s” an d “ or di nary ” are “ to be co ns tru edinth ei r or di na ry m ean in gs .” Aus ti n v . Comm is si on er, 2 63 F.2d46 0, 4 64 (9t h C ir. 1 95 9) , rev ’g T.C. Mem o. 1 95 8- 71 . It wen t o n t o s ay th at“ [t]he word‘ bu si ne ss ’ * * * im pl ie s t ha t o ne is ke ptm or e o r le ss bu sy.” Id. (al te rat io n i n o rig in al ). It d id n’t li ke wis e te ll us what“ or di na ry ” m ean s. Perhaps itm ean s “ [o ]ccurr in g i n t he reg ul ar co ur se of e ve nt s; no rm al ; u su al .” Bla ck ’s Law Dict io na ry 12 73 (10 th ed . 20 14 ). Or perhaps it ’s un de rs to odas a“ co nc ep t o f no rm al cy [th at ] requi res forit s ap pl ic at io n ach ro no lo gy anda hi st ory to de te rm in e if

th e sa le s * * * to cu st om ers were t he us ua l o r a d ep artur e fro m th e n orm .” W in th ro p, 4 17 F.2dat 9 12 . W e kn ow t ha t “pr im ari ly” m ean s “ pr in ci pa ll y ” o r “ of fir stim po rtanc e.” Ma la t v . Ri dd el l, 3 83 U.S. 56 9, 5 72 (19 66 ). Incas es wher e o uraim

is to di st in gu is h c ap it al fro m ord in ary in co m e, we ha ve he ldth atwe ha ve to an swe r al l thr ee que st io ns affi rm at iv el y to fin d p ro pe rty is no t capi ta l. Th atm ig htm at te r he re: Ryth er’s s al es of s crap were ce rta in ly

“ or di na ry ” in so m e se ns e whe n o ne co ns id ers th is en ti re s ev en -y ear h is to ry . See St ark e v . Comm is si on er, 3 12 F.2d60 8, 6 09 (9t h C ir. 1 96 3) (co ns id eri ng who le

“ co ur se of t he kn own y ears ”), rev ’g 35 T.C. 18 (19 60 ). It was rep et it iv e an d n ot- 12 -

[* 12 ] ou t o f th e n orm . Butwere the sal es pa rt o f a trad e o r bu si ne ss ? If no t, the n th ei r “ or di na rin es s” do es n’t m at te r. W e al so paus e to no te so m ethi ng els e th atth e cas es tel l u s m ay be im po rta nt : Rythe r as anin di vi du al tax pa y er i s n otth e sa m e as Ryth er ac ti ng as ag en t o f ei th er o f hi s co rp or at io ns . W e h av e li tt le do ub t tha t i f Kni gh t St eel ha d so ldth e sc rap m et al , th e sa le s wo ul d’ve be enpa rt o f it s b us in es s. Bu t the foc us of ou r an al y si s h as to be on Ryth er. InEst at e o f Ferb er v . Comm is si on er, 2 2 T.C. 26 1 (1 95 4) , we hel d t ha t the in co m e fro m th e sa le of p ro pe rty tran sf erre d t hr ou gh anest at e was cap it al ga inan d n otord in ary in co m e, ev enth ou gh itcle arl y wou ld ’ve b een ord in ary in co m e in th e h an ds of t he de ced en t. Id . at 2 63 -6 4 (“ th e de ced en t’s es ta te , whi ch is th e p et it io ne r he re, i s a d iff eren t t ax pa y er an d i te m s whi chwere n otcap it al ass et s i n t he ha nd s o f th e d eced en t m ay ne ve rth el es s b e cap it al ass et s i n t he ha nd s o f th e es ta te ”); see als o B erry Petro le um Co . v. Co m m is si on er, 1 04 T.C. 58 4, 6 50 n.4 8 (1 99 5) (no ti ng th atth e ch arac te r of pr op erty inth e h an ds of o ne co m

pa ny m ay be di ffer en t i n t he ha nd s o f a s uc ces so r co m pa ny), aff’d, 14 2 F .3d44 2 (9 th Cir . 19 98 ). The Ni nth C irc ui t s im il arl y affi rm edus inan ot he r cas e whe re the ch arac te r of in co m e ch an ge d b ecau se itwas anest at e’s rat he r th anth e d eced en t’s. Co m m is si on er v . Lin de , 21 3 F .2d1, 7 -8 (9 th Cir . 19 54 ), rem an di ng on ot he r gr ou nd s 1 7 T.C. 5 84 (19 51 ); s ee al so Uni te d- 13 -

[* 13 ] Sta te s v . Ros eb ro ok , 31 8 F .2d31 6 (9 thCir . 19 63 ) (i nt en t o f so m e m em be rs of a joi ntve ntur e to co nduc t b us in es s o f ho ld in g p ro pe rty no t at tri bu te d t o o ne pe rcen t m em

be r who he lditas i nv es tm en t). Ryth er’s s itua ti on is an al og ou s. With th is inmin d, we turn t o t he fact or s. Freque nc y

an d R eg ul ari ty of Sal es Thi s fa ct orfav or s Ryth er b ecau se he so ldscr ap on av erag e o nl y on ce o r twi ce a m on th . There are a l arg e num be r of cas es wher e th e Co m

m is si on er h as su cces sf ul ly argu edth atm or e act iv e act iv it y th anRyth er’s was n’t en ou gh to be a tra de or b us in es s. Th e ta xp ay er i n P urvi s v . Comm is si on er, 5 30 F.2d13 32 (9t h Ci r. 19 76 ), aff’g T.C. Me m o. 1 97 4- 16 4, fo r ex am pl e, arg ue d t ha t h e qua li fie d a s a

“ tra de r” o f se cu rit ie s i n o rd er t o t ak e ad va nt ag e o f ad di ti on al de du ct ib le ex pe ns es . The co urt fo un d t ha t h e was m erel y anin ve st or , no ti ng th athe di dn ’t try to tak e adva nt ag e o f sh ort-t erm

swi ng s i n m ark etpri ces an d t ha t h e “ en ga ge d i n o nl y 75 sa le s o f se cu rit ie s an d t ensh ort-t erm co m m od it ie s s al es ” in si x years. Id . at 1 33 4. The Co m m is si on er l ik ewis e p rev ai le d i n As sa de rag hi v. Co m m is si on er, T.C. Mem o. 2 01 4- 33 . Ass ad erag hi ex ecu te d 5 35 sec ur ity tra de s i n 2 00 8 a nd18 0 tra de s i n 2 00 9, an d yet we fo un d t he se act iv it ie s d id n’t m ak e h im a tr ad er. He m ad e th es e tr ad es on15 4 d ay s i n 2 00 8 and94 da y s i n 2 00 9. Si m il arl y , we fou nd th atth e ta xp ay er fa il edto pro ve he was i n t he bu si ne ss of g am bl in g i n M erk in v.- 14 -

[* 14 ] Co m

m is si on er, T.C. Mem o. 2 00 8- 14 6, ev enth ou ghwe st il l fo un d h e ga m bl edforov er 3 00 ho ur s o ne y ear, i d. The re ar e cas es th atm ig htsee m to fav orth e Co m

m is si on er. Fo r ex am

pl e, in W in eb erg v. Co m

m is si on er, 3 26 F.2d15 7, 1 63 -6 4 (9 th Cir . 19 63 ), aff’g T.C. Mem o. 1 96 1- 33 6, the Nin th Cir cu itaffi rm edou r fi nd in g t ha t the tax pa y er was in th e b us in es s o f se ll in g t im be r, th ou gh th ere wer e o nl y 10 7 s al es ov er t eny ears . In Ro y st er v . Comm is si on er, T.C. Mem o. 1 98 5- 25 8, af f’d, 82 0 F .2d11 56 (11 th Cir . 19 87 ), we fo un d t ha t the tax pa y ers he ldreal est at e fo r sa le inth e o rd in ary co ur se of bu si ne ss , th ou gh th ere wer e o nl y 40 sal es ov er n in et een y ears . W e b el ie ve th atRyth er’s cas e is m or e li ke th e st oc k- tra di ng an d g am bl in g cas es th anth e ti m

be r an d re al -es ta te on es . Scrap ha s p ub li sh edpri ces , li ke sh ares of st oc k, an d i s ea si ly liqui da te d. Lik e sh ares of s to ckitrequi res li tt le or n o ex pe ns e fo r m ai nt en an ce o r im pr ov em en t. The same can’t b e sa idfor ti m be r an d real est at e, bo th of wh ic h c anrequi re ex pe ns e an d e ffo rt t o b e sa labl e. Andth e real est at e b us in es s i n p art ic ul ar o fte n s op s up s ig ni fic an t t im e an d e ffo rt i n fin di ng cu st om ers . Des pi te rel at iv e eas e in fin di ng cu st om ers an d t he li tt le to no effo rt r equi red to m ak e th e sc rap sal ab le , Ryth er s ol d s crap at m os t o n 2 4 d ay s a year, an d o nl y on ce p er d ay . The Co m

m is si on er ad m it s t ha t i s wh atm ak es Ryth er’s s al es- 15 -

[* 15 ] “ sp or ad ic .” W e fi ndth is fact orfav or s Ryth er-- th athe de ci de d t o s el l the sc rap sl owl y

ov er t im e in st eadof i n o ne lu m p d oe sn ’t m ak e th e sa le s a b us in es s, an y m or e th anli qu id at in g abl oc k o f dupl ex es ina st rin g o f sa le s i ns te adof a ll at on ce m ak es ita bu si ne ss . See Hel le r Tru stv. Co m m is si on er, 3 82 F.2d67 5 (9 th Ci r. 19 67 ), rev ’g T.C. Mem o. 1 96 5- 30 2. Subs tant ia li ty of Sal es W e’ve p rev io us ly fou ndth at“ th e larg e d ol la r am ou ntof t he sal es su gg es ts th atth e p ro pe rty is h el d fo r” s al e in th e o rd in ary co ur se of abu si ne ss . Guard ia n In du s. Co rp . v. Co m

m is si on er, 9 7 T.C. 3 08 , 32 0 (1 99 1) , aff’d wit ho utpubl is he d op in io n, 2 1 F .3d42 7 (6 th Cir . 19 94 ). W e’ve h el d t hi s t o b e anim po rta ntfact or , bu t i t i s a f

act or th atcango eithe r way . Ryth er’s s al es to ta le d o ve r $3 00 ,00 0 o ve r se ve n years. Th is am ou ntm ig htsee m in subs ta nt ia l t o alar ge co m pa ny, butitwas subs ta nt ia l t o Ryth er. Itis als o u nd is pu te d t ha t the se sal es co m pr is ed10 0 p erce nt of hi s n etin co m e. Inth is sen se , th e sa le s m us t b e subs ta nt ia l. Bu t tha t d oe sn ’t ne ces sa ril y

m ean th e fac to r di sf

av or s Ryth er. The tax pay er i n Wil li fo rdm ad e a pr of itof o ve r $1 .7 m il li on fro m sel li ng hi s p ers on al pa in ti ng s. Will ifo rd , T.C. Mem o. 1 99 2- 45 0. As he ha d re po rte d l os se s fr om hi s b us in es s as anartde al er fo r th aty ear, thi s m ean t tha t h is in co m e fro m th os e sa le s was mor e th an10 0 p erce nt of hi s n etin co m e. W e fo un d t he am ou ntwas s ub st an ti al , bu t we n ev erthe le ss st il l- 16 -

[* 16 ] fou ndth atth is fact orfav or edhi m be cau se “ whe re s ub st an ti al pro fit s re su lt fro m cap it al ap pr eci at io n andno t the tax pay er’s eff orts * * * i nf

reque ntsal es th at ge ne rat e la rg e p ro fit s t en d t o s ho w th atpro pe rty was h el d fo r in ve st m en t.” Id ., 19 92 W L 18 88 95 , at * 5. Gu ard ia n In du st rie s, 9 7 T.C. at31 0- 15 , sh ows th e co nt ras t. The tax pa y er i n t ha t ca se was aph ot of in is hi ng firm

whi ch ge ne rat ed si lv er was te th atitso ldto refi ne rs , with t ot al sal es reac hi ng clo se to $6 m il li on du rin g t he two y ears at i ss ue , whi ch was 4 0 p erce ntof i ts ne t i nc om e al th ou gh les s th anfou r pe rcen t o f it s g ro ss rece ip ts . W e fo un d t ha t the se sal es were s ub st an ti al . Id . at 3 20 . How t o re co nc il e su ch cas es ? W e th in k t he an swe r is to lo okclo se ly at W il li fo rd ’s m en ti on of t he “ ta xp ay er’s eff orts .” InW il li fo rd , th e ta xp ay er b ou gh t ei gh t p ie ces of art years earl ie r an d d idno th in g b utke ep an d s el l the m . Ryth er’s sc rap is inth is sen se m or e li ke artth ansi lv er. He di dn ’t do an yth in g t o c reat e th e 9 sc rap . His e ffo rts were l im it edso le ly to l iqui da ti ng it . This is indi rectco ntras t t o Gua rd ia n wh ere t he tax pa y er’s s il ve r was te was abypro du ctof i ts on go in g bu si ne ss . Guard ia n, 9 7 T.C. at31 3. Be cau se Ryth er’s s al es were “ sp or ad ic ” an d W e wil l ab st ai n fr om

ph il is ti ne co m

m en ts ab ou t an y

ot he r si m il ari ti es 9 be twee n s crap m et al an d fi ne art --Rythe r’s co nduc t ce rta in ly pro ve s tha t h is scr ap m et al wasn ’t si te -s pe ci fic . Cf. Serrav. GSA, 8 47 F.2d10 45 , 10 47 -4 8 (2 d C ir. 19 88 ).- 17 -

[* 17 ] ge ne rat edlar ge pro fit s wi th li tt le effo rt, we fi ndth atalt ho ug h the sal es were subs ta nt ia l, thi s fa ct ordo es n’t fa vo r th e Co m m is si on er. It ’s neu tra l. Len gth o f Tim e th e Pro pe rty W as Held The ne xtfact orth e cas es tel l u s t o l oo k a t i s the len gt h o f ti m e a t ax pa y er ho ld s p ro pe rty. L ik e subs ta nt ia li ty, th is fact orcanbe am bi gu ou s. Whatm ak es it am bi gu ou s i s tha t d iff

eren t p ro du ct s ca n o rd in ari ly tak e d iff eren t l en gt hs of t im e to se ll . W e h el d i n Dav idTay lo r Ent ers ., Inc . v. Co m m is si on er, T.C. Mem o. 2 00 5- 12 7, tha t the sal es of c la ss ic cars were s al es inth e o rd in ary co ur se of b us in es s (a nd th us ge ne rat edord in ary in co m e). W e n ot edth atth e ta xp ay er unque st io nabl y he ld it s cl as si c car s m

uc h l on ge r th anithe ldne w cars , bu t tho ug htitwas b ecau se cl as si c car s re qu ire d m or e m ai nt en an ce, ap pr eci at edinva lu e o ve r ti m e, an d h ada sm al le r cu st om er b as e. Turn ov er o f in ve nt ory ina m ark etli ke th atis jus t or di na ril y go in g t o b e m

uc h s m al le r. W e th us fou ndth ata ho ld in g p eri odof s ev en to ten y ears forth e cl as si c car s s ol d dur in g t he y ear i n i ss ue di dn ’t m ean th atth ey were n otbe in g s ol d dur in g t he ord in ary co ur se of b us in es s. Ouran al y si s i n t ha t ca se is pa rti cu la rly hel pf ul he re. W e u nd ers to odth at se ve n t o t eny ears see m edli ke a lo ng ti m e to ho ldpro pe rty tha t was supp os edto be so ldto cu st om ers . Butwe co nc lu de d t ha t i n t ha t m ark etitwas o rd in ary be cau se cla ss ic cars requi re ex te ns iv e o ng oi ng care an d m ark et in g. Rythe r- 18 -

[* 18 ] li ke wis e so ldhi s s crap ov er the co ur se of s ev eny ears . Unl ik e Tay lo r’s cl as si c car s, Ryth er’s s crap requi redno m ai nt en an ce. Itals o re qu ire d n ex t t o n o m ark et in g: Scrap ha s a p ub li sh edm ark etpri ce, an d Ryth er ea si ly sol d i t. In de ed , he co ul d’ve so lditth e d ay he go t i t. Inth is m ark et , th en , on e wou ldex pe cta sh ort ho ld in g p eri odif Ryth er was ho ld in g i t p rimaril y forsal e to cu st om ers inth e or di na ry co ur se of b us in es s. Onth e fac ts of t hi s ca se , th en , a ho ld in g p eri odof se ve n years p ers ua de s u s t ha t Ryth er was n’t h ol di ng hi s s crap forsal e in th e or di na ry co ur se of b us in es s. Seg reg at io n o f Pro pe rty From Bu si ne ss Pro pe rty Thi s fa ct oris ne ut ral he re. Ryth er h ada si ng le bi g p il e o f sc rap , no t co ll ect io ns of b us in es s s crap an d p ers on al scr ap th athe co m m in gl ed --u nl ik e th e ta xp ay er i n Wil li fo rdwho so ldartfora li vi ng bu t al so ha d ape rs on al co ll ect io n. Pu rp os e o f Acqui si ti on Thi s fa ct ordi rect s u s t o fi ndou t wh ethe r a t ax pa y er b ou gh t o r m ad e th e pr op erty inqu es ti on to ho lditor s el l i t. Thi s fa ct oris als o n eu tra l h ere- -th ere si m pl y aren ’t eno ug h fa ct s t o d et erm in e whe n andwhy Ryth er ac qu ire d t he scr ap . The parti es st ip ul at edth atKni gh t St eel ab an do ne d t he scr ap , th atRyth er res earc he d s crap who le sa le rs , andth atRyth er s ta rti ng sel li ng th e sc rap in20 04 . Perh ap s Ryth er d eci de d t o t ak e p os se ss io n o f th e sc rap on ly after h e le arn edth ere- 19 -

[* 19 ] was am ark etforit , whi ch wou ldin di cat e th athe acqui reditforres al e. Or pe rh ap s h e imm ed ia te ly too k p os se ss io n o f it , andfig ur edth atm ay be so m ed ay

it co ul d b e u se fu l, wh ic h wo ul d i nd ic at e th athe in te nd edto ho ldonto it . As th is cas e was subm it te d u nd er Ru le 12 2, we d on ’t hav e an yth in g e ls e to go on . 1 0 Sal es an d Ad ve rti si ng Effo rt InW il li fo rdwe als o l oo ke d a t wh ethe r th e ta xp ay er ad ve rti se d t he pro du ct , orwhet he r he at l eas t d id so meth in g to en ha nc e it s v al ue . See al so Guar di an , 97 T.C. at 3 25 (“ th e fai lu re t o i m pr ov e p ro pe rty so ldin di cat es th atsu chpro pe rty is no t h el d p rimaril y

forsal e”). Bo th pa rti es he re ag ree t ha t Ryth er s pe ntno th in g t o se ll th e sc rap , andth is let s u s fi ndth athe di dn ’t adv ert is e th e m et al or d o a nyth in g el se to m ak e itm or e sa labl e. Bu t we d on ’t th in k t ha t wo ul d b e o rd in ary in th is Subm it ti ng th is cas e u nd er Ru le 12 2 d oe sn ’t cha ng e th e d efau ltbu rd en 1 0 of -p ro of rul es . Rul e 1 22 (b ). The d efau ltrul e is th atth e b ur de n i s o n t he tax pa y er to sh ow t he de fic ie nc y

is wron g, an d n ot hi ng he re ch an ge s t hi s. See Bo rch ers v. Co m m is si on er, 9 5 T.C. 8 2, 9 0 (1 99 0) , aff’d, 9 43 F.2d22 (8th C ir. 1 99 1) . At ti m es , we’ ve he ldth atth e ta xp ay er fa il edto m eethi s b ur de n b ecau se th ere was n’t en ou ghin fo rm at io n i n t he reco rd . See, e.g ., id . at 9 1; Meu ni er v . Comm is si on er, T.C. Mem o. 1 99 1- 44 6 (“ if t he fact s wer e fu ll y de ve lo pe d we m ig htha ve reac he d a di ffer en t re su lt . But , inth e p res en t s ta te of t he reco rd , we m us t h ol d a ga in st pe ti ti on er fo r fai lu re t o c arry his bu rd enof p ro of ”). The reco rdhe re i s m or e th an en ou ghto reac h ade ci si on on whet he r Ryth er was en ga ge d i n atra de or b us in es s. The se fact or s ar e u se d t o a idou r an al y si s b utaren ’t nec es saril y ex haus ti ve or m an da to ry . Guard ia n In du s., 9 7 T.C. at31 6. Al th ou gh a li tt le m or e in fo rm at io n wou ldbe he lp fu l, the reco rdis no ne th el es s co m pl et e en ou gh forRyth er t o m eet hi s b ur de n. A few p ie ces of t he pu zzl e m ig ht ’ve fal le n o utof t he bo x, b uten ou gh are f il le d i n t o b rin g the en ti re p ic tu re i nt o v ie w.- 20 -

[* 20 ] m ark et . The t ax pa y er i n Gu ard ia n a ls o a rg ue d i t d id n’t adve rti se or a ct iv el y se ll th e si lv er was te . Id. at32 4. Th is was tru e, bu t we fo un d i t d id n’t fa vo r th e ta xp ay ers be cau se “ m ark etco nd it io ns m ad e itun ne ces sa ry forpe ti ti on ers to en ga ge inan y

sal es effo rts to di sp os e o f th e si lv er was te --re fin ers act iv el y co m pe te d t o p ur ch as e th e si lv er was te .” Id . The m ark etforscr ap is m or e li ke th e si lv er m ark et --i t t oo ha s es tabl is he d p ric es , andon e can sel l b y si m pl y pi ck in g up th e p ho ne an d arran gi ng de li ve ry . No o th er ad ve rti si ng wou ldbe ord in ary. W e fin d t ha t thi s fa ct orals o n ei th er fa vo rs no r di sf av or s Ryth er. Tim e an d Eff

ort Dev ot edto th e Sal es Ryth er was act iv e in sel li ng hi s s crap . He rese arch edscr ap who le sa le rs an d co nt act edth em

to arra ng e sa le s. Th e am ou ntof t im e Rytheractua ll y sp en t o n th es e act iv it ie s i s, h owe ve r, en ti rel y un cl ear. An d i t d oe sn ’t app ear tha t b uyers cam e to Ryth er i n t he way cu st om ers co m e to a st or e to bro wse . W e th eref or e fi nd th is fact orto be ne ut ral . How the Sal es Pro ceed s Were Use d Thi s fa ct orask s wh ethe r Ryth er u se d t he pro ceed s t o re pl ace t he scr ap with m or e sc rap . Usin g p ro ceed s fr om sal es to rep le ni sh in ve nt ory is anex cel le nt in di cat orth atth e p ro pe rty is h el d fo r sa le as p artof areg ul ar b us in es s ac ti vi ty. Bu t “ ta xp ay ers who sel l o ff p ro pe rty the y do no t i nt en d t o re pl ace a re o fte n- 21 -

[* 21 ] acco rd edcap it al ga in tre atm en t fo r li qu id at in g acap it al ass et .” W il li fo rd , 19 92 W L 18 88 95 , at * 7. In de ci di ng th atth e fu r in he rit edby the est at e in Ferb er was cap it al pro pe rty, it was im po rta ntto us th atth e es ta te ne ve r acqui red ad di ti on al furwith t he sal e p ro ceed s. Ferbe r, 22 T.C. at 2 64 . This factbo ls te red th e co nc lu si on th atth e es ta te was s el li ng th e fo rm er i nv en to ry so le ly to l iqui da te it . Id. It ’s un di sp ut edth atRyth er d id n’t u se th e p ro ceed s t o b uy m or e sc rap bu t sl owl y li qu id at edth e la rg e p il e o f sc rap to pa y ev eryday ex pe ns es . This fact or gr eat ly favo rs Ryth er. Co nc lu si on W e fi ndth atRyth er’s s crap wasn ’t pro pe rty pri m ari ly hel d fo r sa le to cu st om ers inth e o rd in ary co ur se of atra de or b us in es s b ecau se th e sa le s wer en ’t pa rt o f a trad e o r bu si ne ss . “ Carry in g o n abu si ne ss * * * i m pl ie s an oc cupa ti on al un de rta ki ng to whi chon e h ab itua ll y de vo te s t im e, at te nt io n, o r effo rt wi th subs ta nt ia l re gu la rity . Merel y di sp os in g o f * * * as se ts at i nt erm it te ntin te rv al s, witho utm or e, is no t en ga gi ng inbu si ne ss . . . .” Aus ti n, 2 63 F.2dat 4 64 . W e th eref or e al so fin d t ha t the in co m e th atRyth er re al iz edfro m sel li ng th e sc rap is n’t ne t ea rn in gs fro m

sel f-em pl oym en t u nd er s ect io n 1 40 2( a)(3 )(C) . As th is is th e- 22 -

[* 22 ] on ly inc om e in qu es ti on , we con cl ud e th atRyth er i sn ’t li ab le forsel fem pl oym en t t ax . Deci si on wil l b e en te redun de r Ru le 15 5.