House Sale Poll

[Black Bart]

Oh alright; put it to a vote. What was it? Withdraw from Iraq? Don't withdraw? No, wait -- it was from Snag's original post of "1099 requirements." I'll bet he's a bit miffed that we got so far afield from his question, but since we've gone this far...well... in for a penny, in for a pound.

P.S. If anybody wants to propose a new solution not included in the choices, list it below.

[LTS]

another choice

i vote sch d with 1099misc/nec filing.
my expanded answer is at the end of the original post.

[outwest]

Before you all reply, consider this..

This is a tax court decision that spells out the factors... Think them through, weight them and vote away.

Note: the court applied these factors in total. Just because one factor supports one position (such as #4 frequency) does not the case make.


Maddux Construction Co. v. Commissioner, 54 T.C. 1278

Subchapter P, secs. 1201 et seq., I.R.C. 1954, provides for special treatment of gains received on the sale of capital assets. Section 1221(1) excludes from the definition of a capital asset "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." In Malat v. Riddell, 383 U.S. 569, 572 (1966), the Supreme Court concluded with respect to this statutory provision:

The purpose of the statutory provision with which we deal is to differentiate between the "profits and losses arising from the everyday operation of a business" on the one hand * * * [citation omitted] and "the realization of appreciation in value accrued over a substantial period of time" on the other. * * * [citation omitted.] A literal reading of the statute is consistent with this legislative purpose. We hold that, as used in section 1221(1), "primarily" means "of first importance" or "principally."


Our task here is to determine whether petitioners held the property involved "primarily" for sale to customers in the ordinary course of its business as that phrase is interpreted by the Supreme Court in the above quotation.

This question is purely a factual question, the burden of proof being upon petitioner. Several factors have been enumerated by the courts for the determination of the question, some of which are: (1) The purpose for which the property was initially acquired; (2) the purpose for which the property was subsequently held; (3) the extent to which improvements, if any, were made to the property by the taxpayer; (4) the frequency, number, and continuity of sales; (5) the extent and nature of the transactions involved; (6) the ordinary business of the taxpayer; (7) the extent of advertising, promotion, or other active efforts used in soliciting buyers for the sale of the property; (8) the listing of property with brokers; and (9) the purpose for which the property was held at the time of sale. See James G. Hoover, 32 T.C. 618 (1959); Ralph J. Oace, 39 T.C. 743 (1963). None of the above factors are conclusive standing alone, but rather all of the factors taken as a whole govern. W. T. Thrift, Sr., 15 T.C. 366 (1950).

[Snaggletooth]

Forked Tongue

I'm old enough to remember the tax rates before Nixon's "minimum" tax and "maximum" tax.

Yes, there WAS a maximum tax. Because the highest bracket for ordinary income was 70% (not a misprint guys and gals, especially you younger ones), the new law placed a "maximum" tax rate of 50% on EARNED income.

In those days the FICA ceiling was $4800/year at 3.6%. People had FICA withheld from their checks until about March or April. Self-employment tax was about 140% of the FICA rate, not double like it is today.

So the IRS took wealthy taxpayers to court for purposes of reclassifying Earned income and making it "ordinary" income. After Social Security bases and rates exploded, the 70% bracket was repealed, hence no need for the "maximum" tax. Meanwhile, Nixon's "minimum" tax has survived until modern day, and as a matter of fact, is more robust now than ever.

After this change of events, the IRS began speaking with Forked Tongue. Suddenly, they began to reclassify "ordinary income" and calling it "earned income." They ran headlong into old court cases where they had previously won in the other direction and for YEARS were unsuccessful in reversing their position.

[newbie]

Voted Sched C

(1) The purpose for which the property was initially acquired: To fix up and resell.

(2) the purpose for which the property was subsequently held: Not to hold but to fix up and sell.

(3) the extent to which improvements, if any, were made to the property by the taxpayer: Extensive improvements.

(4) the frequency, number, and continuity of sales: First time - says no more flippers.

(5) the extent and nature of the transactions involved: A lot of materials and 4 subs - rather extentsive and possibly very time consuming coordinating this "investment"..

(6) the ordinary business of the taxpayer: No connection.

(7) the extent of advertising, promotion, or other active efforts used in soliciting buyers for the sale of the property: Unknown.

(8) the listing of property with brokers: Unknown

(9) the purpose for which the property was held at the time of sale: After extensive improvements, to make a profit.

None of the above factors are conclusive standing alone, but rather all of the factors taken as a whole govern.

[OldJack]

I voted Sch-D as the single first time investment with improvements only constitutes a jointly held capital asset and does not meet any test that it is a trade or business.

As it is not a trade or business it is recognized as only personal entities so no 1099 should be issued by the individuals.

[Black Bart]

Oh alright,

...no 1099 should be issued by the individuals.

I'll quit doin' it. But if I'm audited, I'm tellin' 'em OldJack from Missouri said it was okay.

[RLymanC]

Form 4797

Am I way off base here. This could be clasified as depreciable property and sold using form 4797 and then flowing to Sch.D

Would appreciate a comment...thanks

[OldJack]

Am I way off base here. This could be clasified as depreciable property and sold using form 4797 and then flowing to Sch.D

For it to be form 4797 property it has to be code §1231 "business property" (and further, in the case of real estate §1250, or 1252, 1254, 1255, business property) and be put into a business use for depreciation to be applicable. The original post would imply this is §1221 property that would be reported on form 1040 Sch-D as it is not being used in a trade or business. All capital assets begin as §1221 property (1040 Sch-D) and you have to do something to or with the property to make it business property.

To make a further point I would also point out that a capital asset can be owned by a business and still be code §1221 property if the property is not used in the business and held for investment.

[Taxref]

I agree with Old Jack on the 4797 issue. Form 4797 is for the sale or disposition of assets used in a business.

In this case, the house is not used in the business. The house was purchased and improved for the purpose of resale. The issue here is whether this is investment property or business inventory.

[LTS]

multiple definitions of trade or business?

I voted Sch-D as the single first time investment with improvements only constitutes a jointly held capital asset and does not meet any test that it is a trade or business.

As it is not a trade or business it is recognized as only personal entities so no 1099 should be issued by the individuals.

i'm just asking. i value your expertise.

i agree with the first part that follows along the lines of outwest's tax court post about what is profit/loss from a trade or business and what is a gain from a capital asset.

second part - for who must file fm 1099misc, the entire 3 sentences in the instructions for form 1099misc are:
Report on fm 1099misc only when payments made in course of trade or business.
Personal payments are not reportable.
You are engaged in a t/b if you operate for GAIN or PROFIT.

So, file 1099misc?

[OldJack]

You are engaged in a t/b if you operate for GAIN or PROFIT.

So, file 1099misc?

I agree a 1099Misc is needed "IF" you are engaged in a trade or business. Just because you expect a gain or profit on your investment does not in itself make it a trade or business. I think the key words that makes a business (in your quote) is "if you operate" rather than the words gain or profit. No one would make an investment in anything unless they thought they would make a gain or profit, therefore, if gain or profit was what makes a business there would not be such tax status as "Investor". If you invest in a Certificate of Deposit at the bank you expect a gain or profit, but no one would call that a business. If you invest in a "London Bridge" no one would call that a business unless you "operate" it as a business such as charging to cross it.

If you file a 1099Misc when you are NOT in business, you make an argument for the IRS auditor that you have said that you are in business.