Win for Real Estate Professionals in Tax Court


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Real estate agents, take heart! In a new Tax Court Summary Opinion, the Tax Court took on the new IRS definition of Real Estate Professional, and came down on the side of real estate agents.

First the disclaimer. The case at hand (T.C. Summary Opinion 2009-29) is a Summary Opinion. It uses a different standard of evidence and is a less formal proceeding than a standard Tax Court case. Also, Summary Opinions can’t be appealed. Both of these things mean you aren’t allowed to directly cite this case or rely on it … sort of.

In the Tax Court cases that you can rely on and cite in your own case, the IRS retains the right to appeal any decision to the state Appeals Court. And, because those differ from state to state, Tax Court cases can be overturned in one district, while being upheld in another. The lack of appeal rights in a Summary Decision is the problem. Otherwise, if a Tax Court made a ruling – as they did here – on an unsettled area of the law, they could be accused of legislating from the bench, and doing an end run around Congress.

Anyhow … having said all of that I LOVE THIS RULING!! Essentially the whole thing turned on the definition of “brokerage.” The IRS said she was a real estate agent, not a broker, and thus she couldn’t be an REP, because under the IRS’s new interpretation of the term “broker”, real estate agents didn’t count. The Petitioner argued that agents “bring together buyers and sellers,” and that’s more commonly known as … brokering.

The Tax Court looked at the term brokerage under the IRS code and found it was undefined and never tested by legislation or case law. That being the case, they could look apply the “reasonable standard” test. Under that test, which included a bunch of caselaw AND the Webster’s Dictionary definition, the Court found that “brokerage” means “the business of a broker” or “the fee or commission for transacting business as a broker.”

Then the Court went back to the IRS code section in question (Section 469(c)(7)(c)) and said that for the purposes of that particular section, the business of a real estate broker includes, but is not limited to, (1) Selling, exchanging, purchasing, renting or leasing real property; (2) offering to do these activities; (3) negotiating the terms of a real estate contract; (4) listing of real property for sale, lease or exchange; or (5) procuring prospective sellers, purchasers, lessors or lessees. In other words, EXACTLY what the Petitioner was doing as a real estate agent.

The Court also noted that under California law, the term “real estate broker” means anyone who performs one of the activities set out above for compensation. Apart from noting the agreement in legislative language they didn’t do anything else with that fact, because CA law doesn’t matter as far as Federal income tax was concerned.

Summing it all up, the Court decided the Petitioner met the definition of being engaged in “brokerage”, met the material participation tests, spent more than half of her working hours working in real estate … and was a Real Estate Professional who was entitled to deduct all of her real-estate losses.

I think this is a huge victory, especially for people in California fighting the REP battle. Back to that “sort of” thing I mentioned at the beginning. No – you can’t pull this case out as proof of your REP status, but if your facts match the facts presented in this instance, and you use the bundles (and bundles) of caselaw cited by the Tax Court that you CAN use … you’ve got a very good chance of the Tax Court ruling your way. Hopefully the next bunch of cases run through regular Tax Court, so they can be cited as precedent.

If you’re interested in reading the full decision, you can download it here. (Thanks to Forum Member wayside, for finding the decision)



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