Article on RE Professionals and Tax Court Case

[Zee]

I received a email link to this article a short time ago, and thought those with RE agents claiming to be RE professionals for tax purposes might find this court case helpful.

http://www.brokeragentsocial.com/TReXPartners/blog/1831/

[erchess]

Thank You Zee

I read the article you referenced and the court decision that article referenced. It specifically states that it is not to be used as a precedent in any other case and if I am up on the way things work, it was produced by a panel of three tax court judges who might not be representative of the thinking of the whole Court.

We all know that the IRS has long had success in maintaining that only a Licensed Real Estate Broker is a Real Estate Professional entitled to treat Real Estate Losses as ordinary rather than passive. The one thing I carry away from this case is that this particular Real Estate Agent won her case and was allowed by the court to call herself a Real Estate Professional based on the dictionary definition of the word "broker".

[Zee]

I read the article you referenced and the court decision that article referenced. It specifically states that it is not to be used as a precedent in any other case and if I am up on the way things work, it was produced by a panel of three tax court judges who might not be representative of the thinking of the whole Court.

We all know that the IRS has long had success in maintaining that only a Licensed Real Estate Broker is a Real Estate Professional entitled to treat Real Estate Losses as ordinary rather than passive. The one thing I carry away from this case is that this particular Real Estate Agent won her case and was allowed by the court to call herself a Real Estate Professional based on the dictionary definition of the word "broker".

Of course, any TC case can be overturned and may not be accepted as a precedent. But, you're correct, this case clearly states it should not be used as a precedent.

However, do keep in mind this article is being communicated to RE agents, so many will be asking their tax preparers for advice or insisting it's the correct interpretation.

[erchess]

Showing my ignorance here

My reading of this case is that in order to benefit from the ruling, a taxpayer must be a real estate agent who does not possess a real estate broker's license but who has rental properties on which the paper tax loss exceeds $25K because (I assume) such a person may claim losses on their Schedules C under the same rules that would apply to any other alleged business that is losing money.

Am I wrong?

[New York Enrolled Agent]

I believe there are a number of inaccuracies in this thread.

First, TC cases are heard by a single judge and his/her decision is the decision of the Tax Court. When a TC case is released it is the decision of the Court.

Tax Court cases (regular & memorandum decisions) can be cited as precedent with full precendential value given to regular cases. Court cases can be over-ruled - even the Supreme Court can reverse itself (Plessy v. Ferguson is a classic example). This particular case cannot be cited as precedent because it was held under the "small case" rules and IRC §7463(b) explicitly states these cases are final and cannot be cited as precedent.

The decision is not to allow a deduction on Schedule C but rather to allow the losses on the rental activities on Schedule E to be deemed non-passive and therefore be allowed to offset ordinary income.

[Zee]

I believe there are a number of inaccuracies in this thread.

First, TC cases are heard by a single judge and his/her decision is the decision of the Tax Court. When a TC case is released it is the decision of the Court.

This particular case cannot be cited as precedent because it was held under the "small case" rules and IRC §7463(b) explicitly states these cases are final and cannot be cited as precedent.

Thanks for the information. Now, the question is how would one advise a taxpayer in a similar situation, given the case cannot be cited as a precedent?

[New York Enrolled Agent]

Precedent is a legal term where a previously decided CASE is recognized as authority for the disposition of other cases. Other examples that can not be used as precendent include PLRs and Chief Counsel advices.

However, that would not preclude a practitioner from using any of the above when dealing in an examination with the IRS. I think these types of non-precendential material do give the practitioner authority (see Reg §1.6662-4(d)) to argue a taxpayer's case.

[Corduroy Frog]

Discussion of Precedent

I think these types of non-precendential material do give the practitioner authority (see Reg §1.6662-4(d)) to argue a taxpayer's case.

I've been waiting on someone to say this.

What about non-precendential material giving the practitioner authority to argue FOR a taxpayer's case???

One of the IRS' dirty tricks is to ignore court decisions on a wholesale basis, and press EVERY CASE even to court on a particular issue, even though they are establishing a lousy track record in the Tax court or various Courts of Appeal. The essence is they will raise revenue as most taxpayers will simply pay up rather than go to court.

The most blatant example of this (in my memory) was the wholesale war on independent contractors. Large numbers of IRS offices were reclassifying all independent contractors as employees. The purpose was to make a statement, which was more important than evaluating the facts for each taxpayer. At the time, they were publishing the well-known "20 factors" and even though some taxpayers would be non-employees given a preponderance of these factors, IRS proceeded to reclassify anyway. Of course, the IRS didn't take anyone to court -- it was the taxpayer's choice to do so. IRS would lose these cases overwhelmingly, yet did not alter their position as very few taxpayers chose to go to court. I believe 1998 was the year Congress stepped in and stopped the practice.

It is said that "truth is a double-edged sword" but in the tax world the blade only seems to cut in one direction.

[Bees Knees]

One of the IRS' dirty tricks is to ignore court decisions on a wholesale basis, and press EVERY CASE even to court on a particular issue, even though they are establishing a lousy track record in the Tax court or various Courts of Appeal. The essence is they will raise revenue as most taxpayers will simply pay up rather than go to court.

My experience at audit is that auditors cave in when an Enrolled Agent gets involved and starts citing court cases, including court cases that cannot be cited.

I think it is more likely that you will win at audit when using small claims tax court cases and PLRs. It is probably rare when IRS decides to make an issue out of something that they think they will lose if taken to court. Most of the time, the auditor is not looking for a fight.

[Burke]

This discussion seems to revolve around Real Estate Professionals who are licensed members of a state Real Estate Board as either agents or brokers. But what about the average Joe who is in the "business" of renting properties, actively managing them, meets the hours requirements, and has no other source of income (other than wife's job).