Court Opinion

ID: 4340259
Source: CourtListenerOpinion
Date Created: 2018-11-14 08:23:14.379098+00
Date Added: 2024-06-11T14:48:43.697070
License: Public Domain

T.C. Memo. 2016-56

                         UNITED STATES TAX COURT

                   THOMAS L. RYTHER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

      Docket No. 17002-13.                          Filed March 28, 2016.

      Thomas L. Ryther, pro se.

      Sandy Hwang, for respondent.

                           MEMORANDUM OPINION

      HOLMES, Judge: When his steel-fabrication business dissolved, Thomas

Ryther found himself lacking income but in possession of a large quantity of scrap

steel. To remedy the lack of income, Ryther sold the scrap whenever he needed to

pay his bills. Ryther reported the sales as taxable income, but the question

presented in this case is whether he had self-employment income subject to the
                                        -2-

[*2] Code’s self-employment tax. And the answer to this question depends on

whether these sales amounted to a trade or business.

                                    Background

      Ryther incorporated Knight Steel in April 1997 and was its sole owner,

officer, and board member. The firm fabricated steel frames, mostly for general

contractors. Those contractors would bring large beams to Ryther which he would

cut to size and in which he would drill bolt holes so that the contractors could

easily assemble them into a frame at a construction site.

      Knight Steel’s fortunes sagged after the stock market collapsed in 2000. In

2001 it fell behind on paying employment taxes, and the IRS assessed trust-fund

penalties against it.1 The troubles continued, and in 2004 a chapter 7 bankruptcy

trustee took over the company to manage its liquidation. The trustee closed the

business in April, and the bankruptcy court discharged the company’s debts the

following January. In winding up Knight Steel’s operations, the trustee focused

on the company’s cash and accounts receivable and chose to abandon the

company’s few items of tangible property--a couple run-down trailers, some well-

      1
          The IRS assesses penalties against employers who don’t remit the taxes
they withheld from employees. These penalties are called trust-fund penalties
because money that employers withhold from their workers’ paychecks is held in
trust for the United States. See Pollock v. Commissioner, 132 T.C. 21, 25 n.10
(2009).
                                        -3-

[*3] used fabrication equipment, and a large pile of scrap steel--because they

appeared to be worthless.

      Ryther didn’t let the failure of Knight Steel sideline him. Even before that

firm entered bankruptcy, Ryther had incorporated a second business, Mission

Steel. When Knight Steel died, Mission Steel took control of its abandoned

trailers and fabrication equipment and assumed its land leases. Ryther hoped to

continue in the steel-fabrication business, but the new company never did much

business. Ryther still had bills to pay, so he needed to find another source of

income. He didn’t have far to look: The scrap steel was about to come in handy.

      Like all fabrication businesses, Knight Steel had generated scrap. The scrap

that it generated was of substantial size: Some pieces were 40 feet long and

weighed hundreds of pounds. Because he had no need for it when his business

was active--except for needing it out of the way--Ryther would just leave the scrap

in the empty lot next to his fabrication equipment. In a supersize version of the

breeding colonies of paperclips many office workers keep in their desk drawers,

Knight Steel’s scrap pile grew continually from 1997 to 2004. During all this time

Ryther was unaware the scrap had any value, and he never tried to sell it. But in

2004 he beheld the scrap pile and fabricated a new idea. After doing some

research, he discovered that scrap had not only value but also an active market.
                                         -4-

[*4] He also learned that wholesalers were willing to come to his lot, fill their

trucks with scrap steel, and pay him cash for what they took. Over the next seven

years he sold scrap steel once or twice a month,2 to at least five different scrap

wholesalers, in sales that totaled over $317,000:

                   Year                             Receipts from scrap sales3
                   2004                                      $40,367
                   2005                                      26,046
                   2006                                      45,757
                   2007                                      60,584
                   2008                                      60,440
                   2009                                      55,740
                   2010                                      29,838

      Ryther didn’t file tax returns during these years. In February 2012 he

untimely filed all seven missing returns, and reported his scrap sales as

miscellaneous income. In April 2013 the Commissioner sent him a notice of

deficiency and determined that Ryther’s sales were a trade or business and his

income from those sales was therefore subject to self-employment tax.

      2
      In the interest of avoiding the IRS, Ryther dealt solely in cash and didn’t
want more cash on hand than he needed to pay his monthly expenses.
      3
        Ryther kept no records, but the parties stipulated these amounts based on
his personal expenses for each year.
                                        -5-

[*5] Ryther, a California resident, filed a timely petition. The only issue we have

to decide is whether his income from the scrap-metal sales is subject to self-

employment tax. The parties agreed that they needed no trial and submitted the

case under Rule 122.4

                                    Discussion

      We begin with the Code. Section 1401 imposes a tax on “self-employment

income.” Section 1402 defines self-employment income as “net earnings from

self-employment” which it defines as “the gross income derived by an individual

from any trade or business carried on by such individual.” Sec. 1402(a) and (b).

Section 1402(c) tells us that the phrase “trade or business” means the same in

section 1402 as it does in section 162. Section 162, however, is a dead end.

Nowhere in that section--or anywhere else--does the Code define “trade or

business.”5 The Supreme Court long ago forged a plug for this gap and defined a

trade or business as an activity engaged in for income or profit and performed with

continuity and regularity. Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).

      4
        All section references are to the Internal Revenue Code in effect for the
years at issue and all Rule references are to the Tax Court Rules of Practice and
Procedure.
      5
       The Code uses the phrase “trade or business” in at least 800 subsections,
but never defines it. Commissioner v. Groetzinger, 480 U.S. 23, 27 (1987).
                                         -6-

[*6] Other cases tell us that whether an activity is a trade or business is a question

of fact. Whitney v. Commissioner, T.C. Memo. 1990-163; see also Higgins v.

Commissioner, 312 U.S. 212, 217 (1941).

      Both parties thus correctly focus on the factual question of whether Ryther’s

activity was a trade or business. And we won’t pretend the question is an easy

one--cases can be found that support each of the parties.6 We think, however, that

the solution is a bit clearer if we begin with the property that Ryther sold rather

than how often he sold it. Section 1402(a)(3)(C) exempts the sale of a taxpayer’s

own property from the definition of “self employment income.” But there are two

big exceptions. The first is for the sale of property that is the “stock in trade or

other property of a kind which would properly be includible in inventory if on

hand at the close of the taxable year.” Sec. 1402(a)(3)(C)(i). The second is for the

sale of “property held primarily for sale to customers in the ordinary course of the

trade or business.” Id. cl. (ii). In other words, the Commissioner wins if Ryther’s

scrap sales fall within either exception; Ryther wins if they don’t.

      6
         Compare Hastings v. Commissioner, T.C. Memo. 2009-69, slip op. at 9
(gambling not a trade or business even though taxpayer gambled virtually every
weekend and holiday), with Basada v. Commissioner, T.C. Memo. 1998-144, slip
op. at 3 (finding that taxpayer’s “street-hustling”is business, even absent evidence
of time spent hustling).
                                          -7-

[*7] Property held as “inventory” and property “primarily held for sale in the

ordinary course of a trade or business” overlap in many situations. A retailer, for

example, might sell a number of different toys. These toys are both in his

inventory and held primarily for sale to customers in the ordinary course of

business. But inventory is a broader concept and includes many items not held for

sale. A car manufacturer, for example, keeps many different auto parts on hand.

These parts are also inventory, but are held for assembly into a car and not

primarily for sale in the ordinary course of the company’s business. We don’t

have to plumb the hidden depths of this distinction here, though, because the

parties agree that Ryther was doing nothing to his scrap but selling it. For this

reason, we need only decide if Ryther held the metal primarily for sale in the

ordinary course of a trade or business.

      Yet here again we seem to run into another statutory dead end. Section

1402 doesn’t define the term “property held primarily for sale to customers in the

ordinary course of the trade or business.” The regulations under section 1402 are

similarly silent. But the Code does have a whisper of a clue--both phrases also

appear in section 1221(a)(1), which defines what property isn’t considered a

capital asset. Although section 1221 doesn’t define these terms either, there’s

caselaw under that section and we can look to it to help us solve the mystery
                                         -8-

[*8] before us. See, e.g., Parkside, Inc. v. Commissioner, 571 F.2d 1092, 1094

(9th Cir. 1977) (using section 1221(1) to help construe the meaning of section

543(b)(3)), rev’g T.C. Memo. 1975-14; Si Boo, LLC v. Commissioner, T.C.

Memo. 2015-19 (deciding that the sale of real estate was subject to self-

employment tax for a partnership after first determining the real property was not a

capital asset under section 1221); Gardner v. Commissioner, T.C. Memo. 2011-

137, slip op. at 6 (determining if the taxpayer’s activities fell within the meaning

of section 1221(a)(1) and noting that, if they did, the “principal negative

consequence to [the taxpayer] appears to be an increase in his net earnings from

self-employment and the imposition of a self-employment tax”).

      Distinguishing capital from noncapital assets can be tricky, and the question

is important in most cases because the tax treatment of capital income can be so

different from that of ordinary income. Not here: We aren’t asked to consider

whether Ryther’s gain from the sale of scrap was capital or ordinary, but only

whether its realization requires payment of self-employment tax.7 The language in

      7
         One might wonder why Ryther didn’t have to include the value of the
scrap in his taxable income for the year he took possession of it. Maybe the right
treatment of the scrap was as treasure trove to Ryther on the day it was “reduced to
undisputed possession.” See Rev. Rul. 61, 1953-1 C.B. 17. The amount of the
income on that day would be measured by some calculation of “its value in United
States currency.” Id. After that, Ryther would’ve had a basis in the scrap equal to
                                                                       (continued...)
                                         -9-

[*9] section 1402 and section 1221(a)(1) is identical, and we think the cases

explaining section 1221(a)(1) are exceptionally relevant.8

      And this means we have to shift our focus to fine art. In Williford v.

Commissioner, T.C. Memo. 1992-450, 1992 WL 188895, a taxpayer who sold

pieces of art was a part-time art dealer but claimed that his income from the sale of

particular pieces at issue in his case was capital gain because they were from his

personal collection. We had to decide if these particular pieces were “held

primarily for sale to customers in the ordinary course of a trade or business” or if

they were property held as an investment. We used the following factors:

      •      frequency and regularity of sales;

      •      substantiality of sales;

      7
        (...continued)
the amount of the income. His future scrap sales would then have amounted to a
recovery of basis (plus perhaps a little gain if the price of scrap had increased
since the date he found it) instead of ordinary income. Neither party raised the
issue, however, and we don’t need to consider it further.
      8
         Section 1.1402(a)-6, Income Tax Regs., tells us not to worry about the
character of any gain or loss. It notes that when income is excluded from self-
employment income because it’s a disposition of property that isn’t inventory or
property primarily held for sale to customers, “it is immaterial whether a gain or
loss is treated as a capital gain or loss or as an ordinary gain or loss for purposes
other than determining net earnings from self-employment.” Id. para. (a). And
even if the scrap were a capital asset, proceeds from its disposition would still not
be earnings from self-employment. Sec. 1402(a)(3)(A).
                                        - 10 -

[*10] •      length of time the property was held;

       •     segregation of property from business property;

       •     purpose of acquisition;

       •     sales and advertising effort;

       •     time and effort spent on sales; and

       •     how the proceeds of the sales were used.
Id. at *4.

       We do the same for Ryther’s sale of scrap, and will look at each of these

eight factors individually. We also understand that whenever a court uses a multi-

factor test, it should be cautious in not letting a finding that some factors point one

way and some point the other become an excuse for unconstrained discretion.

Multifactor tests are suitably objective only when each factor helps to get an

answer to a common question, and that question in a case like Ryther’s is whether

he held his scrap “primarily for sale to customers in the ordinary course of a trade

or business.” United States v. Winthrop, 417 F.2d 905, 910 (5th Cir. 1969). And

this leads us to another multifactor analysis. Some of the cases tell us that there

are three questions a court must ask in a case like this:

       •     is the taxpayer engaged in a trade or business?

       •     is he holding the property primarily for sale in that business?
                                        - 11 -

[*11] •      were the sales “ordinary” in the course of that business?

Paullus v. Commissioner, T.C. Memo. 1996-419. The Ninth Circuit long ago told

us that the phrases “trade or business” and “ordinary” are “to be construed in their

ordinary meanings.” Austin v. Commissioner, 263 F.2d 460, 464 (9th Cir. 1959),

rev’g T.C. Memo. 1958-71. It went on to say that “[t]he word ‘business’ * * *

implies that one is kept more or less busy.” Id. (alteration in original). It didn’t

likewise tell us what “ordinary” means. Perhaps it means “[o]ccurring in the

regular course of events; normal; usual.” Black’s Law Dictionary 1273 (10th ed.

2014). Or perhaps it’s understood as a “concept of normalcy [that] requires for its

application a chronology and a history to determine if the sales * * * to customers

were the usual or a departure from the norm.” Winthrop, 417 F.2d at 912. We

know that “primarily” means “principally” or “of first importance.” Malat v.

Riddell, 383 U.S. 569, 572 (1966).

      In cases where our aim is to distinguish capital from ordinary income, we

have held that we have to answer all three questions affirmatively to find property

is not capital. That might matter here: Ryther’s sales of scrap were certainly

“ordinary” in some sense when one considers this entire seven-year history. See

Starke v. Commissioner, 312 F.2d 608, 609 (9th Cir. 1963) (considering whole

“course of the known years”), rev’g 35 T.C. 18 (1960). It was repetitive and not
                                        - 12 -

[*12] out of the norm. But were the sales part of a trade or business? If not, then

their “ordinariness” doesn’t matter.

      We also pause to note something else that the cases tell us may be

important: Ryther as an individual taxpayer is not the same as Ryther acting as

agent of either of his corporations. We have little doubt that if Knight Steel had

sold the scrap metal, the sales would’ve been part of its business. But the focus of

our analysis has to be on Ryther. In Estate of Ferber v. Commissioner, 22 T.C.
261 (1954), we held that the income from the sale of property transferred through

an estate was capital gain and not ordinary income, even though it clearly

would’ve been ordinary income in the hands of the decedent. Id. at 263-64 (“the

decedent’s estate, which is the petitioner here, is a different taxpayer and items

which were not capital assets in the hands of the decedent may nevertheless be

capital assets in the hands of the estate”); see also Berry Petroleum Co. v.

Commissioner, 104 T.C. 584, 650 n.48 (1995) (noting that the character of

property in the hands of one company may be different in the hands of a successor

company), aff’d, 142 F.3d 442 (9th Cir. 1998). The Ninth Circuit similarly

affirmed us in another case where the character of income changed because it was

an estate’s rather than the decedent’s. Commissioner v. Linde, 213 F.2d 1, 7-8

(9th Cir. 1954), remanding on other grounds 17 T.C. 584 (1951); see also United
                                        - 13 -

[*13] States v. Rosebrook, 318 F.2d 316 (9th Cir. 1963) (intent of some members

of a joint venture to conduct business of holding property not attributed to one-

percent member who held it as investment). Ryther’s situation is analogous. With

this in mind, we turn to the factors.

Frequency and Regularity of Sales

      This factor favors Ryther because he sold scrap on average only once or

twice a month. There are a large number of cases where the Commissioner has

successfully argued that more active activity than Ryther’s wasn’t enough to be a

trade or business. The taxpayer in Purvis v. Commissioner, 530 F.2d 1332 (9th

Cir. 1976), aff’g T.C. Memo. 1974-164, for example, argued that he qualified as a

“trader” of securities in order to take advantage of additional deductible expenses.

The court found that he was merely an investor, noting that he didn’t try to take

advantage of short-term swings in market prices and that he “engaged in only 75

sales of securities and ten short-term commodities sales” in six years. Id. at 1334.

      The Commissioner likewise prevailed in Assaderaghi v. Commissioner,

T.C. Memo. 2014-33. Assaderaghi executed 535 security trades in 2008 and 180

trades in 2009, and yet we found these activities didn’t make him a trader. He

made these trades on 154 days in 2008 and 94 days in 2009. Similarly, we found

that the taxpayer failed to prove he was in the business of gambling in Merkin v.
                                         - 14 -

[*14] Commissioner, T.C. Memo. 2008-146, even though we still found he

gambled for over 300 hours one year, id.

      There are cases that might seem to favor the Commissioner. For example,

in Wineberg v. Commissioner, 326 F.2d 157, 163-64 (9th Cir. 1963), aff’g T.C.

Memo. 1961-336, the Ninth Circuit affirmed our finding that the taxpayer was in

the business of selling timber, though there were only 107 sales over ten years. In

Royster v. Commissioner, T.C. Memo. 1985-258, aff’d, 820 F.2d 1156 (11th Cir.

1987), we found that the taxpayers held real estate for sale in the ordinary course

of business, though there were only 40 sales over nineteen years.

      We believe that Ryther’s case is more like the stock-trading and gambling

cases than the timber and real-estate ones. Scrap has published prices, like shares

of stock, and is easily liquidated. Like shares of stock it requires little or no

expense for maintenance or improvement. The same can’t be said for timber and

real estate, both of which can require expense and effort to be salable. And the

real estate business in particular often sops up significant time and effort in

finding customers.

      Despite relative ease in finding customers and the little to no effort required

to make the scrap salable, Ryther sold scrap at most on 24 days a year, and only

once per day. The Commissioner admits that is what makes Ryther’s sales
                                        - 15 -

[*15] “sporadic.” We find this factor favors Ryther--that he decided to sell the

scrap slowly over time instead of in one lump doesn’t make the sales a business,

any more than liquidating a block of duplexes in a string of sales instead of all at

once makes it a business. See Heller Trust v. Commissioner, 382 F.2d 675 (9th

Cir. 1967), rev’g T.C. Memo. 1965-302.

Substantiality of Sales

      We’ve previously found that “the large dollar amount of the sales suggests

that the property is held for” sale in the ordinary course of a business. Guardian

Indus. Corp. v. Commissioner, 97 T.C. 308, 320 (1991), aff’d without published

opinion, 21 F.3d 427 (6th Cir. 1994). We’ve held this to be an important factor,

but it is a factor that can go either way. Ryther’s sales totaled over $300,000 over

seven years. This amount might seem insubstantial to a large company, but it was

substantial to Ryther. It is also undisputed that these sales comprised 100 percent

of his net income. In this sense, the sales must be substantial. But that doesn’t

necessarily mean the factor disfavors Ryther. The taxpayer in Williford made a

profit of over $1.7 million from selling his personal paintings. Williford, T.C.

Memo. 1992-450. As he had reported losses from his business as an art dealer for

that year, this meant that his income from those sales was more than 100 percent

of his net income. We found the amount was substantial, but we nevertheless still
                                         - 16 -

[*16] found that this factor favored him because “where substantial profits result

from capital appreciation and not the taxpayer’s efforts * * * infrequent sales that

generate large profits tend to show that property was held for investment.” Id.,

1992 WL 188895, at *5. Guardian Industries, 97 T.C. 310-15, shows the

contrast. The taxpayer in that case was a photofinishing firm which generated

silver waste that it sold to refiners, with total sales reaching close to $6 million

during the two years at issue, which was 40 percent of its net income although less

than four percent of its gross receipts. We found that these sales were substantial.
Id. at 320.

      How to reconcile such cases? We think the answer is to look closely at

Williford’s mention of the “taxpayer’s efforts.” In Williford, the taxpayer bought

eight pieces of art years earlier and did nothing but keep and sell them. Ryther’s

scrap is in this sense more like art than silver.9 He didn’t do anything to create the

scrap. His efforts were limited solely to liquidating it. This is in direct contrast to

Guardian where the taxpayer’s silver waste was a byproduct of its ongoing

business. Guardian, 97 T.C. 313. Because Ryther’s sales were “sporadic” and

      9
       We will abstain from philistine comments about any other similarities
between scrap metal and fine art--Ryther’s conduct certainly proves that his scrap
metal wasn’t site-specific. Cf. Serra v. GSA, 847 F.2d 1045, 1047-48 (2d Cir.
1988).
                                        - 17 -

[*17] generated large profits with little effort, we find that although the sales were

substantial, this factor doesn’t favor the Commissioner. It’s neutral.

Length of Time the Property Was Held

      The next factor the cases tell us to look at is the length of time a taxpayer

holds property. Like substantiality, this factor can be ambiguous. What makes it

ambiguous is that different products can ordinarily take different lengths of time to

sell. We held in David Taylor Enters., Inc. v. Commissioner, T.C. Memo. 2005-

127, that the sales of classic cars were sales in the ordinary course of business (and

thus generated ordinary income). We noted that the taxpayer unquestionably held

its classic cars much longer than it held new cars, but thought it was because

classic cars required more maintenance, appreciated in value over time, and had a

smaller customer base. Turnover of inventory in a market like that is just

ordinarily going to be much smaller. We thus found that a holding period of seven

to ten years for the classic cars sold during the year in issue didn’t mean that they

were not being sold during the ordinary course of business.

      Our analysis in that case is particularly helpful here. We understood that

seven to ten years seemed like a long time to hold property that was supposed to

be sold to customers. But we concluded that in that market it was ordinary

because classic cars require extensive ongoing care and marketing. Ryther
                                         - 18 -

[*18] likewise sold his scrap over the course of seven years. Unlike Taylor’s

classic cars, Ryther’s scrap required no maintenance. It also required next to no

marketing: Scrap has a published market price, and Ryther easily sold it. Indeed,

he could’ve sold it the day he got it. In this market, then, one would expect a short

holding period if Ryther was holding it primarily for sale to customers in the

ordinary course of business. On the facts of this case, then, a holding period of

seven years persuades us that Ryther wasn’t holding his scrap for sale in the

ordinary course of business.

Segregation of Property From Business Property

      This factor is neutral here. Ryther had a single big pile of scrap, not

collections of business scrap and personal scrap that he commingled--unlike the

taxpayer in Williford who sold art for a living but also had a personal collection.

Purpose of Acquisition

      This factor directs us to find out whether a taxpayer bought or made the

property in question to hold it or sell it. This factor is also neutral here--there

simply aren’t enough facts to determine when and why Ryther acquired the scrap.

The parties stipulated that Knight Steel abandoned the scrap, that Ryther

researched scrap wholesalers, and that Ryther starting selling the scrap in 2004.

Perhaps Ryther decided to take possession of the scrap only after he learned there
                                        - 19 -

[*19] was a market for it, which would indicate that he acquired it for resale. Or

perhaps he immediately took possession of it, and figured that maybe someday it

could be useful, which would indicate that he intended to hold on to it. As this

case was submitted under Rule 122, we don’t have anything else to go on.10

Sales and Advertising Effort

      In Williford we also looked at whether the taxpayer advertised the product,

or whether he at least did something to enhance its value. See also Guardian, 97
T.C. 325 (“the failure to improve property sold indicates that such property is

not held primarily for sale”). Both parties here agree that Ryther spent nothing to

sell the scrap, and this lets us find that he didn’t advertise the metal or do anything

else to make it more salable. But we don’t think that would be ordinary in this

      10
          Submitting this case under Rule 122 doesn’t change the default burden-
of-proof rules. Rule 122(b). The default rule is that the burden is on the taxpayer
to show the deficiency is wrong, and nothing here changes this. See Borchers v.
Commissioner, 95 T.C. 82, 90 (1990), aff’d, 943 F.2d 22 (8th Cir. 1991). At
times, we’ve held that the taxpayer failed to meet his burden because there wasn’t
enough information in the record. See, e.g., id. at 91; Meunier v. Commissioner,
T.C. Memo. 1991-446 (“if the facts were fully developed we might have reached a
different result. But, in the present state of the record, we must hold against
petitioner for failure to carry his burden of proof”). The record here is more than
enough to reach a decision on whether Ryther was engaged in a trade or business.
These factors are used to aid our analysis but aren’t necessarily exhaustive or
mandatory. Guardian Indus., 97 T.C. 316. Although a little more information
would be helpful, the record is nonetheless complete enough for Ryther to meet
his burden. A few pieces of the puzzle might’ve fallen out of the box, but enough
are filled in to bring the entire picture into view.
                                         - 20 -

[*20] market. The taxpayer in Guardian also argued it didn’t advertise or actively

sell the silver waste. Id. at 324. This was true, but we found it didn’t favor the

taxpayers because “market conditions made it unnecessary for petitioners to

engage in any sales efforts to dispose of the silver waste--refiners actively

competed to purchase the silver waste.” Id. The market for scrap is more like the

silver market--it too has established prices, and one can sell by simply picking up

the phone and arranging delivery. No other advertising would be ordinary. We

find that this factor also neither favors nor disfavors Ryther.

Time and Effort Devoted to the Sales

      Ryther was active in selling his scrap. He researched scrap wholesalers and

contacted them to arrange sales. The amount of time Ryther actually spent on

these activities is, however, entirely unclear. And it doesn’t appear that buyers

came to Ryther in the way customers come to a store to browse. We therefore find

this factor to be neutral.

How the Sales Proceeds Were Used

      This factor asks whether Ryther used the proceeds to replace the scrap with

more scrap. Using proceeds from sales to replenish inventory is an excellent

indicator that the property is held for sale as part of a regular business activity.

But “taxpayers who sell off property they do not intend to replace are often
                                        - 21 -

[*21] accorded capital gain treatment for liquidating a capital asset.” Williford,

1992 WL 188895, at *7. In deciding that the fur inherited by the estate in Ferber

was capital property, it was important to us that the estate never acquired

additional fur with the sale proceeds. Ferber, 22 T.C. 264. This fact bolstered

the conclusion that the estate was selling the former inventory solely to liquidate

it. Id. It’s undisputed that Ryther didn’t use the proceeds to buy more scrap but

slowly liquidated the large pile of scrap to pay everyday expenses. This factor

greatly favors Ryther.

                                     Conclusion

      We find that Ryther’s scrap wasn’t property primarily held for sale to

customers in the ordinary course of a trade or business because the sales weren’t

part of a trade or business. “Carrying on a business * * * implies an occupational

undertaking to which one habitually devotes time, attention, or effort with

substantial regularity. Merely disposing of * * * assets at intermittent intervals,

without more, is not engaging in business . . . .” Austin, 263 F.2d at 464. We

therefore also find that the income that Ryther realized from selling the scrap isn’t

net earnings from self-employment under section 1402(a)(3)(C). As this is the
                                       - 22 -

[*22] only income in question, we conclude that Ryther isn’t liable for self-

employment tax.

                                                Decision will be entered under Rule

                                       155.