We have argued

[jainen]

one or another factor

Thanks for all the suggestions. There are several positions supported by good reasoning, but not much in actual citations. The best is the Maddux Construction court ruling.

Maddux said "several factors have been enumerated" but didn't say how to apply them. It does differentiate between "operation" and "appreciation," which is similar to JG's point and consistent with my previous arguments. Investment refers to property held for a significant period of time.

It seems that the number of sales is very important, but no one factor is decisive. Improvements and sales efforts are likewise very important, as is the source of other support.

One new item I came across is the observation that favorable capital gains treatment is an exception to the general rule of income taxability, and therefore it can't be simply assumed just because one or another factor is not present.

[JG EA]

The best information ever on this subject I’ve read was a post by BK and JV in the old QF days. I don’t have it here at home and I’m sure I won’t do it justice.

Their point was: would someone want to be paid for their work, their efforts, as opposed to investing money into something to have that money work for you. If they would want to be paid for their work (for instance - if they were doing this for someone else) it’s a business…

Another point they made: is something bought because of specialized business connections (like a storeowner buying items for resale) then the thing purchased is more like inventory than an investment – therefore a business.

They put it all so much better so that I could really understand it.
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There is also other things to keep in mind – there are extensive regulations on how many years to keep subdivisions so as not to be viewed as a business – therefore it seems that the default is a business.

Also keeping in mind the hobby aspect – does your client only intend on doing this “project” once and so clearly not in the business of…?

[RLymanC]

Home Construction

Try this site, it may help.

http://www.irs.gov/businesses/small/industries/article/0,,id=97934,00.html

[OldJack]

If there are any good cites they are probably within the past argument posts.

[Black Bart]

The big argument

on that stuff was Snaggletooth's "1099" post of 12-16-06 (may be some cites in there).

[jainen]

We have argued about this topic several times -- Is building a spec house for sale an investment or a business? I've always said it is a business because most of the profit comes from the owner's activity rather than from holding the property for market appreciation.

Now that I have an actual client of my own, I'm not so dogmatic. I need to cite some authority for either side. Does anyone know a code section or reg that defines investment in such a scenario, or an example in a pub or court case that demonstrates treatment as a business?