Tax News
Real Estate Investor Argument - Continuing Travails in Allen v U.S.
May 30, 2014
When it rains, it pours.  Just a few weeks after the Tax Court’s decision in Boree, the US District Court for the Northern District of California held against the taxpayer in Allen et al. v. United States, No. 3:13-cv-02501 (May 28, 2014). In a much familiar fact pattern the taxpayer acquired real estate, tried to develop it and sold it down the road. He claimed capital gains but the IRS and the District Court disagreed. As with many other cases that end all the way up in court, the taxpayer struggled with evidence regarding material issues. Also, as with many other small cases (in this instance an individual buying a property at FMV of around $1M) there was hardly any tax planning, and/or legal representation.  In this case the taxpayer incurred the expense of showing up at the District Court, yet, it seems he did not have his game plan straight. He went to argue a developer v. investor case, yet, in his own testimony he admitted that he acquired the property for development. I am far from implying that the taxpayer should perjure himself on the stand. What I am implying is that considering how important intent is in these cases, maybe the taxpayer should have pursed aggressively a settlement upfront and not have bothered to go all the way to court and incur the associated costs.

After the taxpayer got all entangled in the factual intent query, he decided to argue that his intent changed from developer to investor. That of course is a bona fide argument.  However, what the taxpayer did not account for was that the burden was on him to show when and how that intent changed.  Well, the taxpayer failed to carry its burden of proof. From there, things continued to go downhill. The taxpayer argued the one-bite rule, i.e. that because he acquired and sold only one piece of land, he should be viewed as an investor. The District Court flatly disagreed with this citing, Cottle v. Comm’r , 89 T.C. 467, 488 (1987).   Then the taxpayer argued that because he had a job as a civil engineer and worked on the property on the side, he was not engaged in development business. Here too the District Court disagreed because there are cases that recognize that a taxpayer can be involved in more than one business. All and all, things went from bad to worse for the taxpayer. As with many of the other cases that end up on this blog, thorough planning and representation could have saved the day. Of course, competent representation is not a guarantee of success, but at least it improves those chances. Many a time the same thing happens. The taxpayer tries to save money, simply does not care about taxes, or takes the ostrich approach. In the end of the day, all of that ends up costing the taxpayer greatly.
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Tags: dealer v. investor, real estate investor