Opinion ID: 43824
Heading Depth: 2
Heading Rank: 2

Heading: Business Expenses Deduction

Text: A taxpayer generally may deduct expenses that are ordinary and necessary in carrying on a trade or business, 26 U.S.C. § 162(a), but may not deduct personal, living, or family expenses. 26 U.S.C. § 262(a). To be deductible, an item must: (1) “be paid or incurred during the taxable year”; (2) “be for carrying on any trade or business”; (3) “be an expense” (rather than a capital expenditure); (4) “be a necessary expense”; and (5) “be an ordinary expense.” Commissioner v. Lincoln Sav. & Loan Ass’n, 403 U.S. 345, 352, 91 S. Ct. 1893, 1898 (1971) (internal quotation marks and citation omitted). For a taxpayer to be carrying on a trade or business, the “taxpayer must be involved in the activity with continuity and regularity and . . . the taxpayer’s primary purpose for engaging in the activity must be for income or profit. . . .” Commissioner v. Groetzinger, 480 U.S. 23, 35, 107 S.Ct. 980, 987 (1987). “The frequency and substantiality of sales are highly 5 Many of Wood’s contentions respecting the automatic stay relate to a separate notice of deficiency pertaining to the 1992 tax year, which was addressed in a separate proceeding before the Tax Court that was unappealable under the procedures prescribed by 26 U.S.C. § 7463 and was, in any event, outside the jurisdiction of the Tax Court in this proceeding. 26 U.S.C. § 6213(a); Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418, 421-22, 64 S. Ct. 184, 186 (1943). Accordingly, we do not address Wood’s claims relating to the previous Tax Court proceeding. 10 probative on the issue of holding purpose because the presence of frequent sales ordinarily belies the contention that property is being held ‘for investment’ rather than ‘for sale.’” Suburban Realty Co. v. United States, 615 F.2d 171, 178 (5th Cir. 1980).6 A person who is engaged in the business of selling real estate to customers may be characterized as a real estate dealer; however, an individual who holds real estate for investment or speculation and receives rentals therefrom is not a real estate dealer. 26 C.F.R. § 1.1402(a)-4(a). Whether a property is held for sale to customers in the ordinary course of a taxpayer’s business is a question of fact, and must be considered on a case-by-case basis. See Major Realty Corp. and Subs. v. Commissioner, 749 F.2d 1483, 1487-88 (11th Cir. 1985). “The ‘holding purpose’ inquiry may appropriately be conducted by attempting to trace the taxpayer’s primary holding purpose over the entire course of his ownership of the property. . . . Thus, the inquiry should start at the time the property is acquired.” Suburban Realty, 615 F.2d at 183-84 (internal citations omitted). The Tax Court did not clearly err in determining that the Woods’ homes in Annandale, Virginia, Warren, New Jersey, and Boca Raton, Florida were not held 6 Fifth Circuit decisions issued prior to October 1, 1981 are binding precedent in the Eleventh Circuit. See Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc). 11 for sale in the ordinary course of carrying on a real estate business because they were the Woods’ personal residences for substantial periods of time. Nor did the Tax Court clearly err in its finding that the timeshares, the residence in Hilton Head, South Carolina, and the undeveloped parcel in Florida had no business purpose. Wood produced no evidence that he made strenuous attempts to sell the Florida parcel or the timeshares. In fact, he held the Florida parcel for eighteen years, during which time only one expression of interest in a sale was made, initiated by a potential purchaser in 1994. Clearly, four sales over a twenty-year period do not constitute “frequent and substantial” sales. See generally id. at 178. Finally, Wood’s interest in MSPR and the financial assistance that family members provided to finance the home in Boca Raton, Florida do not establish that he was in the real estate business. See Brannen v. Commissioner, 722 F.2d 695, 703 (11th Cir. 1984) (“[T]he business of a partnership is a separate business from that of the partners. . . .”). Accordingly, the Tax Court did not err in finding that Wood was not in the real estate business.