Opinion ID: 43824
Heading Depth: 2
Heading Rank: 4

Heading: The Tax Proceeding

Text: In December 1997, the Commissioner began an examination of the Woods’ 1994, 1995, and 1996 tax returns. On December 21, 1998, the Commissioner issued a notice of deficiency to the Woods for 1994. On July 19, 1999, the Commissioner issued a notice of deficiency for 1995 and 1996. In the notices of deficiency, the Commissioner determined that the Woods were not in the real estate business from 1994 through 1996 and therefore disallowed expenses and losses that the Woods had claimed on Schedule C (Profit or Loss From Business) for those years. The disallowed net losses were $121,966 for 1994, $72,546 for 5 1995, and $345,223 for 1996.2 Wood filed a petition in the Tax Court in which he argued that the Commissioner’s determinations were foreclosed by the filing of the Chapter 11 petition in 1994 because the Commissioner’s issuance of the notices of deficiency violated the automatic stay, see 11 U.S.C. § 362(a), and because the claims had been discharged in the bankruptcy. In addition, Wood argued that he had been in the business of selling real estate and therefore the real estate expenses that he claimed on Schedule C were properly deductible. At trial, Wood testified that he had obtained a New Jersey real estate license in 1973.3 He further testified that he had set up MSPR in Florida to buy large acreage and divide it into lots, that he was a limited partner in MSPR during the tax years at issue, and as such, that he attended a meeting once each year to vote on whether to sell or subdivide a property.4 Wood also testified that he had intended to rent the property in South Carolina rather than live there and that he had formed 2 In the notices of deficiency, the Commissioner made several additional determinations, all of which were either conceded by the taxpayers before trial or sustained by the Tax Court and not challenged by Wood in his opening brief and are therefore abandoned. See Maiz v. Virani, 253 F.3d 641, 674 (11th Cir. 2001) (arguments not raised in the opening brief may not be considered). 3 An exhibit, however, indicated that Wood’s license was returned to the State of New Jersey in 1988. 4 A copy of the partnership agreement provides that “[n]o partner shall take part in the management of the business, [or] transact any business for the partnership. . .” 6 a partnership with his brother and mother-in-law, who contributed $105,000 and $100,000 respectively toward the Boca Raton home. Wood also testified that the attempted sale of the undeveloped property in Florida in 1994 was initiated by the potential buyer. The Tax Court determined that the notices of deficiency were not foreclosed by the Chapter 11 filing because a Chapter 11 filing does not operate as a stay of either an audit to determine tax liability or a notice of tax deficiency, 11 U.S.C. § 362(b)(9)(A) and (B), and in any event, the Tax Court proceeding against Wood was not brought until long after the stay was lifted, which was May 18, 1995, at the latest. See 11 U.S.C. § 362(c)(2). The Tax Court determined that it lacked subject matter jurisdiction to determine whether the Commissioner’s claims were discharged in the bankruptcy proceeding because the jurisdiction of the Tax Court in a deficiency proceeding is generally limited to a redetermination of the correct amount of a deficiency and is unrelated to the collection of the tax. Swanson v. Commissioner, 65 T.C. 1180, 1184 (1976) (action for redetermination of a deficiency “has nothing to do with collection of the tax nor any similarity to an action for collection of a debt”). Turning to the merits, the Tax Court found that Wood did not purchase and hold the homes in Annandale, Virginia, Warren, New Jersey, or Boca Raton, 7 Florida for sale to customers but rather purchased them as personal residences. Likewise, the court found that Wood did not purchase the timeshares in Brookdale, Pennsylvania and Gulfstream, Florida and the residence in Hilton Head, South Carolina for sale to customers because they were personal vacation properties. Noting that there was no evidence that Wood, over an eighteen-year period (1976 - 1994), ever attempted to sell or develop the undeveloped land in Florida, the Tax Court determined that Wood purchased the land as a personal investment and not as property held for sale in the ordinary course of business. Finally, the Tax Court determined that Wood’s investment in MSPR did not establish that he was a dealer in real estate because a partnership is an independently recognizable entity apart from its partners, and moreover, as a limited partner, Wood did not actively participate in the conduct of the partnership business. The Tax Court, observing that the frequency of sales in the real estate context is “highly probative” as to whether properties were held for personal or investment reasons rather than for sale, Major Realty Corp. & Subs. v. Commissioner, 749 F.2d 1483, 1488 (11th Cir. 1985), noted that the Woods had sold only four properties during a twenty-year period. Accordingly, the Tax Court found that the Woods were not real estate dealers, and therefore the losses and expenses incurred could not be deducted as business expenses. 8