Sales Were In Ordinary Course of Business Resulting in Ordinary Income.

Date of decision:

The petitioner was a limited liability company that acquired real estate properties via tax deeds that they purchased at public auctions.  The petitioner then sold the properties under contracts for deed and reported the sales on the installment method as capital gain.  The IRS denied the installment method and capital gain treatment.  The court determined that while the deeds were acquired with the primary intent to profit from their redemption, the continuous property sales of the forfeited properties demonstrated that the petitioner did not intend to hold onto the properties with an expectation in appreciation in value, but to sell the properties in quick fashion for profit.  As such, when combined with the fact that the petitioner employed persons to act on the petitioner's behalf in acquiring the tax deeds, preparing the acquired tracts for sale and maintaining business records, the court determined that the sales were in the ordinary course of the petitioner's business as a dealer in real estate.  Thus, the income from the sales was capital gain in nature and also subject to self-employment tax and could not be reported on the installment method.  SI Boo, LLC v. Comr., T.C. Memo. 2015-19.

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