eBay Trader

Client buys items and resells them on eBay--about 10 sales per month. He has a full-time job that is unrelated to eBay selling and the amount he makes from eBay selling is about 5% of the income he makes from his job, but his eBay activity is increasing. If this was stock trading, I wouldn't have any problem justifying capital asset treatment, but in this case since he is selling to customers through eBay, it isn't automatically denied inventory treatment in the same way stock sales are. Analogizing from Stanley C. Cameron, TC Memo 2007-260 on a stock investor, I could still argue this level of activity is not a trade or business, but eBay selling requires more "work" than stock trading. Anyone see a hole in arguments for capital asset treatment?

Is avoiding SE tax the goal?

How do you get around

property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business

?

If this was stock trading, I wouldn't have any problem justifying capital asset treatment, but in this case since he is selling to customers through eBay, it isn't automatically denied inventory treatment in the same way stock sales are. . Does he specialize, i.e., buy and sell in a narrow range of products? Somehow that would seem like a dealer, e.g., what if he "traded" only in cars? And I see little difference even if he trades across a broad range of items.

The tests for trade or business include regularity and substantiality. Does he meet them?

Dealer v. Investor, appears to be (from what I see) a Dealer, Business Sch C.

All right, put this aside for a while but I am back to it. Thanks for your thoughts on this. Yes, avoiding SE tax is the goal.

What I am finding in my research is that the level of activity here falls into a grey area as far as whether it is sufficiently continuous and regular. In Powell, T.C. Memo 2014-235, I find

Petitioners failed to show that they conducted the North Carolina activity with sufficient continuity and regularity. In 2008 and 2009 petitioner husband worked full time for WPL. On average he worked approximately 45 hours per week. Petitioners received income from WPL. Petitioner husband spent approximately 10 to 15 hours per week developing the North Carolina activity. (emphasis added)

Although the Powell case is distinguished because in that case there was no profit and here there is a small amount of profit, I doubt the client's activity is at this point more than 10-15 hours per week. Like in Powell, the activity in question is not related to the taxpayer's main occupation and source of income.

In Cameron, T.C. Memo 2007-260 referred to above, the court found that 109 purchases and 103 sales through brokerage accounts during a year was not "substantial." As I mentioned, however, I do concede each eBay sale would involve more work than a stock sale.

In Maximoff, T.C. Memo 1987-155, an activity of 20-30 hours per week was considered to be a trade or business, but I don't think this activity consumes that much time.

A perspective: https://turbotax.intuit.com/tax-tips/se ... /L7h6uJr0i

Similar: https://www.cnbc.com/2021/03/26/its-goi ... sales.html

Wouldn't it be better here to examine if the client is a dealer and if the items are used in that capacity, rather than just the substantiality of the client's efforts? Also note that there's a difference between a "trader" and a "dealer". Particularly in the financial world. I don't know that drawing a comparison between a securities *trader* and your client's fact pattern is apples and apples.

Below is from Williford v. Commissioner (TC Memo. 1992-450). Lots of helpful gems in there. Might not be the end of the world if this is Sch C. Potential OIH deduction, mileage, SEP IRA. Who knows...

The function of section 1221(1) is “to differentiate between the ‘profits and losses arising from the everyday operation of a business’ * * * and ‘the realization of appreciation in value accrued over a substantial period of time’”. Malat v. Riddell [ 66-1 ustc ¶9317], 383 U.S. 569, 572 (1966). “Primarily” means “principally” or “of first importance.” Malat v. Riddell, supra.

Whether property is held by a taxpayer “primarily for sale to customers in the ordinary course of * * * business” is a question of fact. S & H, Inc. v. Commissioner [ Dec. 38,791], 78 T.C. 234, 242 (1982). Courts consider numerous factors in deciding this issue, and no one factor is controlling. Biedenharn Realty Co. v. United States [ 76-1 ustc ¶9194], 526 F.2d 409, 415 (5th Cir. 1976). Petitioner bears the burden of proving that his property was not so held. Rule 142(a); Welch v. Helvering [ 3 ustc ¶1164], 290 U.S. 111, 115 (1933).

The following factors indicate whether property is held primarily for sale to customers in the ordinary course of a trade or business: (1) The frequency and regularity of sales; (2) the substantiality of sales; (3) the length of time the property was held; (4) the nature and extent of petitioner's business and the extent to which petitioner segregated the paintings from business inventory; (5) the purpose for which petitioner acquired and held the property before sale; (6) the extent of petitioner's sales efforts by advertising or otherwise; (7) the time and effort petitioner devoted to the sales; and (8) how the sales proceeds were used. Byram v. United States [ 83-1 ustc ¶9381], 705 F.2d 1418, 1424 (5th Cir. 1983); United States v. Winthrop [ 69- 2ustc ¶9686], 417 F.2d 905, 910 (5th Cir. 1969); Ross v. Commissioner [ 55-2 ustc ¶9773], 227 F.2d 265 (5th Cir. 1955), revg. [ Dec. 20,615(M)] T.C. Memo. 1954-177; Goldberg v. Commissioner [ 55-1 ustc ¶9519]; 223 F.2d 709 (5th Cir. 1955), revg. [ Dec. 20,381] 22 T.C. 533 (1954); Guardian Industries v. Commissioner [ Dec. 47,610], 97 T.C. 308, 316-317 (1991).

What sort of $$$$ are we taking about? Is he buying and selling cars, or Polly Pockets?

Thanks again for your help with this. The sales involved are small, probably most under $100 each, and the overall small size of the income is one of the reasons I have doubts about whether a trade or business necessarily exists.

After reviewing the Williford Case (TC Memo 1992-450 cited above) in detail, it seems to me that the determination about whether the taxpayer is a dealer comes down to whether a trade or business exists, as that appears to be the purpose of the analysis under the 7 factors enumerated above. Since the activity was profitable and was pursued to varying degrees every month, it seems like the answer hinges primarily on the question of substantiality.

I am not able to distinguish this case in any material way from the determination made by the Court in Powell, T.C. Memo 2014-235 cited above. In both that case and in this one, the taxpayer has a full-time job that in a different industry from the income producing activity that provides the taxpayer's primary income and in both cases the secondary activity appears to take less than 15 hours per week. In Powell, there was no profit, but the Court did not say that the lack of profit was a factor in its determination of substantiality in that case.

I am not able to find contrary case law for an endeavor found to be 15 hours per week or less.

It appears to me substantial authority exists for capital asset treatment. Though this is the result I wanted in this case, it does worry me that an activity would need to consume more than 15 hours per week under this standard in order to be considered a business if a taxpayer has other full-time employment.