Taxpayer failed to establish dealer status.

R and his spouse purchased three homes between 1974 and 1995 that served as their personal residences:

1. In 1974, they purchased a home in Virginia.

2. In 1977, they sold the Virginia home and purchased a home in New Jersey, which served as their personal residence until 1990.

3. In 1990, they moved into a home in Florida, which they had constructed, and listed the New Jersey residence for sale with a real estate agent. The agent rented the New Jersey residence from 1992 until 1994, when it was sold. The taxpayers remained in the Florida home until the mortgage was foreclosed in January 1996.

In addition to the residences, the taxpayers purchased:

4. An undeveloped parcel of land in Florida in 1976, which they owned through 1996.

5. A home in South Carolina in 1986, which they sold in 1989 to finance the construction of the Florida home.

6. Two timeshares (1977 and 1987), which they owned through 1996.

R obtained a New Jersey real estate license in 1973. He had set up a corporation (MSPR) in 1967, along with other officers, to buy large acreage and divide it into lots. MSPR was converted to a limited partnership. R was a limited partner in MSPR. during the tax years at issue; as such, he attended an annual meeting to vote on whether to sell or subdivide a property. The partnership agreement provided that no partner could take part in the management of the business or transact any business for the partnership.

R testified that he had intended to rent the property in South Carolina rather than live there, and that he had formed a partnership with his brother and mother-in-law, who contributed $105,000 and $100,000, respectively, toward the Florida home. He also testified that an attempted sale of the undeveloped property in Florida in 1994 was initiated by the potential buyer.

The IRS issued a deficiency notice, disallowing expenses and losses that the taxpayers had claimed on Schedule C, Profit or Loss From Business, for 1994-1996, determining that they were not in the real estate management business during those years. Specifically, the Service disallowed (1) expenses attributable to the New Jersey and Florida homes, the undeveloped land and the timeshares and (2) a loss on the sale of the Florida house.

Legal Standards

For a taxpayer to be carrying on a trade or business, the taxpayer must be involved in the activity with continuity and regularity with a primary purpose of income or profit; see Groetzinger, 480 US 23 (1987). "The frequency and substantiality of sales are highly probative on the issue of holding purpose because the presence of frequent sales ordinarily belies the contention that property is being held 'for investment' rather than 'for sale'" (Suburban Realty Co., 615 F2d 171 (5th Cir. 1980)).

A person who is engaged in the business Of selling real estate to customers may be characterized as a real estate dealer; however, under Regs. Sec. 1.1402(a)-4(a), an individual who holds real estate for investment or speculation and receives rentals is not. Whether a property is held for sale to customers in the ordinary course of a taxpayer's business is a question of fact, and must be considered on a case-by-case basis; see Major Realty Corp., 749 F2d 1483 (11th Cir. 1985). "The 'holding purpose' inquiry may appropriately be conducted by attempting to trace the taxpayer's primary holding purpose over the entire course of his ownership of the property....Thus, the inquiry should start at the time the property is acquired" (Suburban Realty, 615 F2d at 183-84).

Conclusion

The Eleventh Circuit affirms that the taxpayer' homes in Virginia, New Jersey and Florida were not held for sale in the ordinary course of carrying on a real estate business, because they were personal residences for substantial periods of time. Also, it holds that the timeshares, the South Carolina residence and the undeveloped parcel in Florida had no business purpose, noting that R produced no evidence of strenuous attempts to sell the parcel or the timeshares. In fact, he held the Florida parcel for 18 years, during which time there was only one expression of interest in a sale, initiated by a potential purchaser in 1994. Four sales over a 20-year period do not constitute "frequent and substantial" sales; see Suburban Realty at 178. Finally, the court holds that R's interest in MSPR and the financial assistance that family members provided to finance the home in Florida do not establish that he was in the real estate business, because the business of a partnership is separate from that of the partners.

JOHN W. WOOD, 11TH CIR., 6/9/05 TTA