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In pertinent part, section 162(a) provides that “There shall
be allowed as a deduction all the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade
or business”. The question is whether petitioners’ activities
that gave rise to the disputed deductions constituted a trade or
business during 1996.
In one sense petitioners’ argument here is unusual.
Generally, a taxpayer seeks to avoid his or her real estate
activity’s being classified as a trade or business in order to
claim the benefit of lower capital gains rates on the sale or
disposition of real property. See, e.g., Thompson v.
Commissioner, 322 F.2d 122 (5th Cir. 1963). Here, petitioners
claim that their real estate activities constituted a trade or
business. The considerations in deciding whether a taxpayer’s
activities are a trade or business are well defined. In Polakis
v. Commissioner, 91 T.C. 660, 669-670 (1988), we stated:
Determining whether a taxpayer’s activities rise to a
level which constitutes “‘carrying on a business’ requires
an examination of the facts in each case.” * * * Among the
tests that courts have come to rely on in divining the
nature of the taxpayer’s activities with respect to real
estate are the following: the nature and purpose of the
acquisition of the property and the duration of the
ownership; the continuity of sales or sales-related activity
over a period of time; the volume and frequency of sales;
the extent to which the taxpayer or his agents have engaged
in sales activities by developing or improving the property,
soliciting customers, and advertising; and the
substantiality of sales when compared to other sources of
taxpayer’s income. [Citations omitted.]
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Last modified: May 25, 2011