Does Section 195 Apply to Section 212 Activities?

Technical topics regarding tax preparation.
#51
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Because I'm not trying to prove that net leases are always trades or businesses. I'm only trying to show that they sometimes are in order to discredit your argument that the phrase "a business where property is regularly based on a net lease basis" is talking about anything other than a business.


Yet you say that we go to Sec 162 to find the meaning of “active trade or business.”

And if the phrase “…a business where property is regularly [rented] based on a net lease basis” isn’t talking anything other than a business, then the taxpayers it’s not talking about (212 taxpayers, always intending to be 212) fall through the cracks. They’d get an immediate deduction for their pre-opening costs as per Post #28…despite what you say.

My best guess is that they wanted to emphasize the requirement for substantial activity to accompany a mere net lease for them to accept that it's a business.


And my best guess is that the net lease described in the PLR, which was accorded non-trade or business classification, was very much akin to the passive net lease mentioned in the 1984 Report. I have a PLR from 1983, you cite a case from the 1950’s that involved a number of properties…

A status quo which you haven't shown to exist.


I think it’s your position that is found not to exist. If it did, you’d be able to point to it in a case, but you can’t. Instead, what the cases show is that once something is started, then gentlemen, start your amortization…

And it’s no wonder that rental activities are covered by the passive rules…whether or not they’re trades or businesses.
 

#52
Chay  
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Jeff-Ohio wrote:Yet you say that we go to Sec 162 to find the meaning of “active trade or business.”

Where is the inconsistency between this and arguing that the term "business" connotes section 162 as well? A "business" is a "trade or business". "Active" is when something is "carried on". There is a clear parallel that can be drawn. The parallel is not crucial to my position, but it does provide a more plausible alternative to your contrivances that allows everything to make sense.

They’d get an immediate deduction for their pre-opening costs as per Post #28…despite what you say.

I provided my counter-argument to this in post #29. Your response was to set up a straw man by claiming my argument ignored the greater context, then knock it down with a dramatic narrative of the struggles of Congress that was grounded in nothing at all, save your "perspective".

You then briefly addressed my actual claim by saying longstanding principles don't matter because Congress "expanded Sec 195 to cover Sec 212 activities via the Senate Report". But guess what...that's your central claim. You actually have to support it before you can use it to do anything else. But no, you'd rather start with your claim as an assumption, use it to brush aside the pre-existence of capitalization principles, and then proceed to argue that there's a gap in the law as a result. You then want to point to this contrived gap as support for the claim you started out with.

Misdirection, straw men, arguments from dramatic narrative, and circular reasoning. That's all you gave us to defend the claim you made in #28.

My best guess is that they wanted to emphasize the requirement for substantial activity to accompany a mere net lease for them to accept that it's a business.


And my best guess is that the net lease described in the PLR, which was accorded non-trade or business classification, was very much akin to the passive net lease mentioned in the 1984 Report. I have a PLR from 1983, you cite a case from the 1950’s that involved a number of properties…

My point was there are multiple different versions of "active" throughout the Code and IRS literature.

I think it’s your position that is found not to exist. If it did, you’d be able to point to it in a case, but you can’t. Instead, what the cases show is that once something is started, then gentlemen, start your amortization…

Show me one example of the pre-opening costs of a section 212 activity held to be amortizable under section 195 by any court with proper jurisdiction or in any document binding on the IRS and I'll concede my entire argument.

Until then, what we have to work from is the evidence before us. A "status quo" is not evident. Court cases are inconclusive. That leaves the law and three reports issued by Congress, which all point to section 212 activities being excluded from amortization. That is, unless you apply heavy "perspective" and imagine that words mean something other than they do in any other context.
 

#53
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with a dramatic narrative of the struggles of Congress that was grounded in nothing at all

Plenty has been written on it, none of which is dramatic. Do you really think practitioners wrote nothing on the 1984 Act when it came out? It’s not my fault if you entire argument is based entirely on what you think and not at all on what others wrote back then…

Misdirection, straw men, arguments from dramatic narrative, and circular reasoning. That's all you gave us to defend the claim you made in #28.


Among all other valid and logical points I’ve made, don’t forget the case language that’s been cited, some of which Coddington describes as “blunt.” Combined, that’s more than the zero cases you have presented.

My point was there are multiple different versions of "active" throughout the Code and IRS literature.

A terrible point indeed, given your stance that there can only be one distinct way the word “business” can ever be used in a sentence…go ask your barber if a passive net lease is a trade or business, he might be able to help you understand.

Show me one example of pre-opening costs to a section 212 activity held to be amortizable under section 195 by any court with proper jurisdiction or in any document binding on the IRS and I'll concede my entire argument.

Why? I’ve already won the argument. You obviously do not see the IRS litigating this issue, because they know they’d lose. And when they have dipped their toe into the 195 area, they have done just that - lose. Like I said in #49 – take a look-see at Charlton. Where is all the discussion of the anticipation, Section 212, Section 162, etc? I’ll tell you where – it’s nowhere. And that’s because judges are ignoring the meaningless distinction found in the ’84 statute addition and are simply asking when something actually started. That’s where were at. That’s the status quo. And you have nothing that says otherwise.

That is, unless you apply heavy "perspective" and imagine that words mean something other than they do in any other context.


You mean like the word “active” that you are now having a little bit of trouble defending, despite your “best guess?”

Again, Chay, just show us a case. You’re the IRS here arguing that something is altogether non-deductible. Surely, there’s been a case or two over the last 35-years, no?
 

#54
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I’ve already won the argument.

On what grounds are you declaring victory?

Give me one strong argument that I haven't already addressed in post #46.

I don't think you've got any strong arguments left. Everything new you're presenting fits into one of these four categories of weak claims:

  1. Straw man attacks on my position.
  2. Arguments that a lack of controversy in the area proves you're right, although this could just as easily imply the question is settled in the opposite direction.
  3. Arguments that there is additional evidence that proves you're right, although you won't produce the evidence.
  4. Contrived problems in the law that your position is necessary to resolve, although the problems have more obvious solutions, or else don't even become problems until you impose your unfounded claims on the law.
Your most recent post, #53, contains one argument I already addressed in post #46, a mix of all of these types of weak claims, and nothing more.

You could in the alternative directly address the points I made in post #46, but you won't do that because you know I'm right about all of what I wrote there. All you can do is try and focus the argument on other areas and accuse me of not considering those areas adequately.

You've been reduced to arguing from a very weak position. By what standard have you "won the argument"?
 

#55
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A "status quo" is not evident.

You only say that because you can’t find a case that says otherwise. And in Toth, I find it interesting that she bought the “land” in 1998, she started her operation in 1998, yet absolutely nothing was required to be capitalized in that year in terms of “pre-opening” expenditures.

That leaves the law and three reports issued by Congress, which all point to section 212 activities being excluded from amortization.


Only the first report pointed to that. The second report didn’t, but instead pointed in the opposite direction. The third report, if it has any relevance, mis-stated the law.

Give me one point that I haven't already addressed in post #46

While you may have addressed them, your arguments just aren’t persuasive.

On what grounds are you declaring victory?

I ran this scenario by some esteemed colleagues, who litigate tax matters for a living…they gave your position a 30% chance of success…

You could in the alternative directly address the points I made in post #46, but you won't do that because you know I'm right about all of what I wrote there.

I could pick apart each and every of your points all day long. But to satisfy your specific request, see the very top of Post #47, wherein I addressed specific comments you made in your Post #46.

So, here we sit…a case involving a guy named Hoopengarner. The Tax Court holds that he can immediately deduct his pre-opening expenses. That loophole is closed with the DRA of 1984, which was signed by Reagan in July of 1984. The provision added to Sec 195 only addressed Hoopengarner, a 212 situation wherein the taxpayer anticipated being in business. You say we’re all well and good…that a 212 taxpayer, who always intended to be a 212 taxpayer, while he wouldn’t get caught up in the anti-Hoopengarner amendment, would get caught up in “old law” stuff anyway, causing his pre-opening costs to be capitalized. That is simply not the case under a Hoopengarner interpretation of Section 212. And that was the state of affairs when the DRA of 1984 was passed - Hoopengarner hadn’t yet been over-turned by the Tax Court. That was not until December of 1989.

So here Congress sits…first thinking there’s no problem, only to learn they’re wrong. So they put in a statutory fix that doesn’t fix everything. And then they substantially modify the definition “active trade or business,” via committee report, so that it no longer means that.

Finally, you are of course assuming that the “old body of law” is not pre-empted by Section 195, post-DRA 1984. That’s a pretty big assumption, one for which you have no support.
 

#56
Chay  
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Jeff-Ohio wrote:
On what grounds are you declaring victory?

I ran this scenario by some esteemed colleagues, who litigate tax matters for a living…they gave your position a 30% chance of success…

Of course it had to be some grounds other than your ability to support the truth of your premises.

I started this thread because I perceived that a number of experienced and respectable professionals, yourself included, held a belief that wasn't supported by the law. If the fact of your belief alone were enough for you to prevail, I wouldn't even have bothered.

The fact that these colleagues of yours gave me a 30% and not a 0% or 5% chance of success is interesting. It makes it seem like they actually weighed the arguments in favor of both positions—something which I haven't seen you do. I'd be curious to know what they see as the deciding factors on each side. Hopefully, it won't be arguments from authority and the four flavors of weak claims from your recent posts.

When I weigh the two positions, I don't find that yours is entirely without merit. Congress probably was concerned about tax shelters and uncapitalized 212 start-up expenses at the time the 195 amendments were drafted, as you say they were. And it's not out of the question for the term "business" to have the meaning you say it does.

What you haven't shown is 1) that Congress was in fact as bent on nabbing 212 tax shelters and their pre-opening expenses as you say they were, 2) that they specifically intended to address these issues in the section 195 amendment, and most importantly 3) that the Committee Report they wrote and the court cases that followed it actually had the effect of addressing those things.

In an effort to prove points 1 and 2, you keep pointing to the terms "net lease" and "passive". But while these terms are consistent with your position, they don't actually prove your position. The terms are consistent with a number of assertions about the section 195 amendments, including mine.

But you brush aside the fact that your take on the intent behind those words is not the only valid one and insist that points 1 and 2 are thus proven. From there, you hold that point 3 follows logically. But like I said, while legislating by Committee Report is possible, it requires that words to the desired effect actually be written. Saying that a trade or business can be "in many respects passive", e.g. by focusing on net leases, but is still considered "active" doesn't change the meaning of "trade or business". There is no support from the courts, the IRS, or subsequent Congressional committees that the meaning of "trade or business" has been altered.

I'll now briefly address the other points you raised:

  1. Toth didn't have to capitalize anything in 1998: this only means anything if she actually had what could be called pre-opening expenses for her section 212 activity and actually tried to deduct them on her return. Neither point can be shown in the opinion.
  2. Old body of law is pre-empted by Section 195: this is a point where the burden of proof is on you. If, as I claim, section 195 doesn't address the pre-opening expenses of 212 activities, why would it make any sense for it to pre-empt anything about them? Section 248 didn't pre-empt the capitalization of partnership organizational expenses before the enactment of section 709. Why is this any different?
  3. Your argument that the status quo is there, I just need to look for it, and your arguments from post #47 that you reference are examples of the four types of weak claims I identified in post #54.
  4. My arguments are unpersuasive and the 2011 Blue Book mis-stated the law: these are merely unsupported opinions.
 

#57
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I'd be curious to know what they see as the deciding factors on each side.

They think your position is pretty well-grounded, as do I, but they are realists, as am I, and they gave a lot of weight to the following idea: The 1980 amendment didn’t cut it. Congress stepped in, in 1984, with the intended aim of reducing controversy. Your position fails on that front. They have come to understand the issue from a very basic premise: Section 195 applies to Section 212 activities. This is the exact same general premise put forth by Coddington, Hamill, the judge in Rose, etc. And they agree with my assessment of tax shelters along with the language in the ’84 report that involves the word “passive” and “net leases” (as supported by the 1983 PLR).

These are not weak claims. As one contemporaneous commentator put it:

Equipment leasing tax shelters usually involve net leased property, as is also often the case with single tenant real estate and with commercial real estate, so that all of these activities standing alone failed to constitute an active trade or business under traditional authorities. Hoopengarner could be used in these situations to obtain current deductions for pre-opening costs under section 212, but not for investigatory costs, as soon as an asset to be used in the activity is acquired, and perhaps even earlier when contractual obligations identifying the activity are assumed. So long as such activities are never "anticipated" to rise to active business status, they would not be caught by the new anti-Hoopengarner additional definition of start-up costs. Therefore, such activities would not be capitalized under post-1984 section 195(a). Clearly, the drafters of the Committee Reports accompanying the 1984 version of section 195 wanted a broader definition of "active business" to render the preemptive section 195 applicable, denying the current deduction of pre-operating costs of such net leased property under section 212.

So, Jeff-Ohio didn’t make anything up here. These aren’t colorful claims. It is relevant background information (i.e. context) that is necessary to have in order to appreciate what was happening at the time. My colleagues think that when the ’84 Report drew in net leases (which they describe as portfolio income, because that’s really what it is, even though related deductions are above the line), that expanded the definition to cover all Section 212 activities, including those that never intended to be a “business.” They also point out something which I already knew: The DRA of 1984 targeted tax shelters in other aspects and, around that time, there were numerous hearings on Capitol Hill pertaining to tax shelters.

The real question in their mind, which I have already mentioned, is the legal effect a court would give to “legislation” that isn’t part of the statute, per se, but is only part of a committee report. They’re pretty confident that the ’84 Report would be viewed as being interpretive/clarifying, meaning that it isn’t creating law all by itself in isolation. And they feel pretty strongly a court would see it that way as well, in light of the general motive behind the 1984 amendment. For that reason, they don’t even think the IRS would litigate the issue.
 

#58
Chay  
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Jeff-Ohio wrote:These are not weak claims.

I agree: the claims you made in your last post aren't weak. You're finally beginning to pull in evidence to support your version of Congressional intent over mine.

It would have been nice of you to do this back around post #30 instead of mounting a straw man attack on my argument—that might have saved us both a whole lot of typing.

Can you provide a citation for the excerpt you inserted and point to the other aspects of the DRA of 1984 that are in line with Congressional intent as you see it?

Also, do you have any sources regarding the contemporaneous tax shelter hearings you mentioned?
 

#59
Chay  
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I happened to stumble on the article you got the excerpt from:

Start-Up Costs, Section 195 and Clear Reflection of Income: A Tale of Talismans, Tacked-on Tax Reform and a Touch of Basics

It appears that section 4 ("1984 Amendments"; pp. 112-117), particularly the bit at the end about how the Committee Report "lost sight of the forest" (echoed in your post #43), sets forth the rationale on which your entire position is grounded. Would that be fair to say?
 

#60
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Would that be fair to say?


Truly, there are many, many pieces to this puzzle. And often, we see sound legal reasoning, such as your reasoning, get pushed aside in favor of some “higher end,” like elimination of controversy. I just kind of think that’s how this situation would play out. But I’d be happy to take the other side of the debate.

As to this comment:

Can you provide a citation for the excerpt you inserted and point to the other aspects of the DRA of 1984 that are in line with Congressional intent as you see it?


What I was saying is that this was about the time when tax shelters were profilerating, so there was a lot of tax shelter stuff “in general” in the ’84 Act. The tax shelter situation played into the backdrop of the Sec 195 issue, I’m pretty sure.

Starting on Page 158 of this piece, various and sundry “tax shelter” related items associated with the DRA of 1984 are mentioned. I only glanced at it, but I know there were other things in the Act, like things about accounting methods.

https://scholarship.law.wm.edu/cgi/view ... ontext=tax

It would have been nice of you to do this back around post #30 instead of mounting a straw man attack on my argument—that might have saved us both a whole lot of typing.


I don’t think we get our best “Chay” if things wind down too quickly…

I’d have to dive into that, but I don’t think they’re hard to find. Here’s one thing, though:

https://www.treasury.gov/resource-cente ... 1-1984.pdf

The comment on Page xiii is interesting, about the front-loading of benefits…

This article is a good layman’s summary of the lay of the land in the early 80’s:

http://archive.fortune.com/magazines/fo ... /index.htm
 

#61
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This article is a good layman’s summary of the lay of the land in the early 80’s:. Now that's more my speed.
 

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