Does Section 195 Apply to Section 212 Activities?

Technical topics regarding tax preparation.
#21
Chay  
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Jeff-Ohio wrote:When there’s something newer, that’s more relevant. Your Post #5 gets into a bunch of nonsense that is irrelevant. What’s relevant is when the relevant Senate Report says a net lease is an active trade or business, “for this purpose.”

The courts would disagree with you on a newer Committee Report being given more weight because it is newer. For example, the Fifth Circuit declared that "[a]lthough a committee report written with regard to a subsequent enactment is not legislative history with regard to a previously enacted statute, it is entitled to some consideration as a secondarily authoritative expression of expert opinion" (Bobsee Corporation v. United States, 411 F.2d at 237). The Senate report you favor should be given more weight on items that were newly enacted along with the report. The term "active trade or business" is not something they came up with, so we should give their interpretation of it "some consideration as a secondarily authoritative expression of expert opinion".

Nowhere in the report do they say "a net lease is an active trade or business". They could not have said this because it would not have been a valid interpretation of the previously enacted law, which specifically excluded section 212 activities such as pure net lease rentals. Rather, they said "a business where property is regularly based on a net lease basis is an active trade or business". They are beginning from the standpoint that an activity is a "business", then talking about how passive it is, then stating that the business is still "active" in spite of all of that. When you read that, you assume no business could ever be that passive and still be a business, so they must not have meant "business". But as I've shown, a business can be that passive and still be a business, so your argument doesn't work.

it’s also well-settled that when someone incurs a cost that relates to a business or an investment activity, it should be recovered somehow, some way, as a deduction.

A lack of section 195 amortization doesn't violate this principle; taxpayers can deduct costs under section 165 on disposition of the activity.

When Congress chooses to carve out exceptions like this, do taxpayers, the courts or the IRS have the right to broaden the scope of the exceptions by reason of corollary alone?


It’s not broadening the scope “by corollary” when Congress says that Sec 212 costs should be treated like Sec 162 costs for purposes of Sec 195. It’s leveling the playing field.

Congress wanted these sections in parity, yes. But "the sections are in parity" does not mean "activities described by the sections are treated equivalently". That's the corollary you want. You can't have it in sections 179, 190, or 199A, so why should you get it in section 195? That section started out with a deliberate inequality between the two types of activities, and at no point in any statute, regulation, committee report or court case do we have anyone saying that there is now equality between the activities. That's not what construing sections 162 and 212 in pari materia means.

My argument is that although a net lease by itself may not be a business, King v. Commissioner shows that one can be in a business centered around doing net leases, therefore "business" actually does mean "business" in the phrase "business where property is regularly based on a net lease basis".

It could mean that, but then again, it could mean that if you rent property on a net lease basis, then “for the purpose” of Sec 195, it’s an active trade or business. That seems very appealing, given the intention set forth in the Senate Report: That the expenses at issue in Hoopengarner (who didn’t even have an activity yet) would be subject to Sec 195.

There's no compelling reason to disregard the word "business" in the Committee Report.

Hoopengarner's expenses needed to get pulled in to section 195 because they weren't being capitalized and assigned to his yet-inoperative section 162 business. There was never an issue about whether someone having a "business" or not mattered for amortization purposes, and no one ever said they were trying to fix that aspect of the law.

any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business,

Strictly construed, this sentence absolutely, 100% means Toth should have lost. No question about it. But guess what? Toth won. Rose also won.

Due to the qualification "in anticipation of such activity becoming an active trade or business", even the strictest construction of this language implies that merely becoming an active trade or business later is not enough for capitalization of presumptive 212 expenses under section 195—some threshold of "anticipation" must also be met. Anticipation implies an eye toward the future and not the present. Courts have leaned heavily in favor of taxpayers in applying this distinction, but they didn't create it—it's right there in the statute.

All your argument does is increase controversy, when the amendment was intended to do the opposite. And when the IRS tries to increase controversy, they get shot down at every turn, as the cases reveal.

You propose that section 195 doesn't mean what it says, the word "business" in the 1984 Committee Report doesn't matter, the term "trade or business" in section 195 has a markedly different meaning from what it usually means in the Code, and the intent of the 1980 Congress has been overridden with no obvious evidence that this is so. If we accept your proposals, then we are in a much more uncertain position than we otherwise would be. Uncertainty gives rise to controversy. Using your own logic, we should reject your argument.

You think it makes sense that a normal business deduction is allowed under 162, a normal production of income expense is allowed under Sec 212, a start up cost for a normal business is amortizable under Sec 195, but a start-up cost for a Sec 212 activity isn’t. I’m sorry, but that makes no sense.

It might not seem fair to you, but that result was what Congress explicitly intended for in 1980.

We’re talking about routine, everyday transactions that are easy to handle. Yet, you want to put a unique spin on things, based SOLELY on your interpretation of the statute, to upset the apple cart.

If there's an "apple cart" in the tax prep industry, it must be IRS forms and publications. They say the following:

From Publication 535:

    For costs paid or incurred before October 23, 2004, you can elect to amortize business start-up and organizational costs over an amortization period of 60 months or more. See How To Make the Election, later.

    The cost must qualify as one of the following.

    A business start-up cost.
    An organizational cost for a corporation.
    An organizational cost for a partnership.

    Business Start-Up Costs
    Start-up costs are amounts paid or incurred for (a) creating an active trade or business, or (b) investigating the creation or acquisition of an active trade or business. Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit, and for the production of income in anticipation of the activity becoming an active trade or business.
From the instructions for Form 4562:

    Start-up and organizational costs.
    You can elect to amortize the following costs for setting up your business.
    • Business start-up costs (section 195).
    • Organizational costs for a corporation (section 248).
    • Organizational costs for a partnership (section 709).
Imagine you're a relatively inexperienced tax preparer who relies on explanations like this. Ok, you think, it has to be a business to qualify. Plan and simple. But then you browse through the TaxProTalk taxation forum and discover to your dismay that apparently, nothing is as it seems. Neither the IRS publications and instructions, nor the direct intent of the 1980 Congress, nor the 1984 Committee Report's consistent use of the term "business" can be relied on. You find that in order to be confident you are doing your job correctly, you have to learn deep theory that operates behind the scenes of what Tax Court judges actually say in their opinions.

In your world, everything about section 195 has a unique spin. In mine, none of it does.
Last edited by Chay on 27-Jun-2019 12:19pm, edited 1 time in total.
 

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The courts would disagree with you on a newer Committee Report being given more weight because it is newer.


The courts wouldn’t even get that far.

Further, if we really do want to go by your strict reading of the statute, if we have a Sec 212 activity that is always intended to be a Sec 212 activity, with no anticipation of it ever being a business, those pre-activity expense wouldn’t even fall under Sec 195 and we could just expense them out like Hoopengarner did. That seems odd, doesn’t it? A fix to the statute that doesn’t fix anything with respect to a Sec 212 activity that was always intended to be a Sec 212 activity…
 

#23
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Jeff-Ohio wrote:
The courts would disagree with you on a newer Committee Report being given more weight because it is newer.


The courts wouldn’t even get that far.

Why not?

Further, if we really do want to go by your strict reading of the statute, if we have a Sec 212 activity that is always intended to be a Sec 212 activity, with no anticipation of it ever being a business, those pre-activity expense wouldn’t even fall under Sec 195 and we could just expense them out like Hoopengarner did. That seems odd, doesn’t it? A fix to the statute that doesn’t fix anything with respect to a Sec 212 activity that was always intended to be a Sec 212 activity…

We don't need pre-opening costs to fall under section 195 for them to be capitalized—we've got Hardy for that. Hardy involved the 1982 tax year, which was of course before section 195 became effective as a capitalization provision as we've discussed. But the Tax Court still held that the expenses needed to be capitalized under the pre-opening expense doctrine. The expenses happened to relate to an active trade or business, so amortization of the costs was allowed. But that point was never in question.

The question was: is section 212 in pari materia with section 162 with regard to the pre-opening expense doctrine? The answer was yes, and it would still be yes even if section 195 were repealed. That, and nothing more, is the actual significance of Hardy.
 

#24
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Jeff-Ohio and Chay, haven't we had enough of this? Can't you two just "agree to disagree"?
 

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As I read this I keep wondering what specific expenses are being considered. They must lie outside of Section 197(d) and they must not relate to a depreciable asset. What are they and how sure are we that 197 can not be invoked?

I do have to thank Chay for one thing: he has given me a reason to use the word bombastic in a sentence
Because on T.A. ten was the most you were allowed
 

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The expenses happened to relate to an active trade or business


…which isn’t really consistent with the fact pattern presented…

Hardy involved the 1982 tax year, which was of course before section 195 became effective as a capitalization provision as we've discussed.


That’s not all that helpful either…
 

#27
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Tenletters wrote:As I read this I keep wondering what specific expenses are being considered. They must lie outside of Section 197(d) and they must not relate to a depreciable asset.

Jeff-Ohio wrote:
The expenses happened to relate to an active trade or business


…which isn’t really consistent with the fact pattern presented…

As Tenletters implies, the expenses we're discussing are unusual. You've got to build a fact pattern like in #16 to have any, but at that point one questions whether the expenses are truly "necessary" for such a low-level activity. A lot of expenses would be capitalized to income-producing assets, too. So, I doubt either of us is going to be able to come up with a court case involving a section 212 activity that had expenses in both an inactive and an active phase.

But that's okay, because the pre-opening expense doctrine applies equally to both section 162 and 212 activities notwithstanding section 195. One can attribute the doctrine to the "carrying on" and/or "ordinary" requirements of section 162 itself. In this case, we derive an equivalent doctrine from section 212, which is meant to be construed in pari materia with section 162 with the single exception of the "trade or business" requirement. There is also a deep-structure distortion of income rationale for the doctrine, and using this approach it applies universally wherever an activity that produces income is analyzed by the Code.

This means that what applies to the petitioner's business in the Hardy ruling also applies to the section 212 activity in your fact pattern.

Hardy involved the 1982 tax year, which was of course before section 195 became effective as a capitalization provision as we've discussed.


That’s not all that helpful either…

The very fact that Hardy's expenses were paid before section 195 could capitalize them, but they still had to be capitalized regardless, is what shows that we don't even need section 195 for pre-opening expenses to be capital. You complain that my interpretation will omit pure section 212 activities from section 195 capitalization, but they don't have to be there in the first place thanks to Hardy and all of the case law it's based on.
 

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The very fact that Hardy's expenses were paid before section 195 could capitalize them, but they still had to be capitalized regardless, is what shows that we don't even need section 195 for pre-opening expenses to be capital.

Nope. There’s a few problems with that idea. First, Hoopengarner came before it. And that Tax Court decision was affirmed by a higher court. But this is just Hoopengarner…and remember, that was a case where we had a Section 212 activity, if you will, that was anticipated to later be a trade or business. Therefore, all Hardy could do is overturn Hoopengarner. Hardy couldn’t create new facts involving a Sec 212 activity always intending to be a Sec 212 activity. Moreover, since Hardy involved tax year 1982, the DRA of 1984 couldn’t possibly have any application to that case. Sure, the DRA of 1984 was discussed in that case, but the import of that discussion is nil to any situation involving non-Hoopengarner facts. But that doesn’t matter, since the DRA of 1984, by statute, did the exact same thing as the Hardy court – deny immediate expensing of Hoopengarner-type pre-opening expenses.

You say that such a situation would be handled be existing case/tax law. The problem with that notion is that Congress spoke. They first spoke with the 1980 Senate Report. It was pretty clear there what the intent was: It was just as you say – to keep Sec 212 activities out of Sec 195 amortization treatment (60-months at the time). But the problem you have is the 1984 Senate Report (more so) and the related legislation (less so). The legislation (i.e. the statute) included the anti-Hoopengarner provision. Obviously, that would capture the Hoopengarners of the world. But what it would not catch is the net lease tax shelters – the Sec 212 activities that never anticipated being businesses. The people that wrote that report got all nervous because of the Hoopengarner decision and realized that things like net lease tax shelters, which weren’t businesses, would escape the capitalization clutches of Sec 195, and therefore, could immediately expense their pre-opening costs. So the drafters of the 1984 Senate Report laid down a command. They were careful not to “change” any definitions, as they wrote, “…intends that the definition of start-up expenditures be generally the same as under present law but clarifies the definition to cover certain pre-opening expenses.” And in doing so, they drew net leases into the picture, which we all know, are not trades or businesses. Obviously, the word “business” in that net lease section was intended to be used loosely. It follows, that it was intended to be used loosely in the preceding sentence of the report that talks about “a trade or business that is many respects passive” (and this was before the passive loss rules were enacted). Your interpretation of these matters is not persuasive. You say the word “business” in the 1984 report wasn’t being used loosely, but rather, was being used in the traditional sense. (And then you want to have a debate about circularity and non-sequiturs). It’s not that complicated, as that simply does not comport with what the Senate Report was trying to accomplish with the few sentences in the report, which was to prevent net lease tax shelters from immediately expensing their pre-opening costs. Your reading would still allow net lease tax shelters to escape Sec 195, because they are not businesses. However, you would say that there is pre-existing case law that would make such expenses capitalizable and non-amortizable. The problem with that argument is that the Senate Report sentences to the 1984 Act throw pre-opening expenses of Sec 212 activities into the pre-emptive clutches of Sec 195. This is precisely was Coddington said in that other thread.

The real question is whether or not the 1984 Senate Report language can “over-write” the 1980 Senate Report language. As previously stated, I think it does and I think it can. The drafters of the 1984 Senate Report were very careful to state that they were not changing any definitions. They were not interpreting anything. They simply added to the existing definition…so as to expand it to cover Sec 212 activities. And this is precisely how the professional literature sees things.

Is this history a mess of sloppiness? Sure is. We basically have a bare bones statute with certain critical pieces only to be found in competing Senate Reports. But we are left to make a judgement call. I side with the taxpayer. There is no possible way that my position on this mess of a situation would or should be in favor of the government…especially when you have zero case law to support your argument.
 

#29
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Jeff-Ohio wrote:Therefore, all Hardy could do is overturn Hoopengarner. Hardy couldn’t create new facts involving a Sec 212 activity always intending to be a Sec 212 activity.

In overturning Hoopengarner, Hardy didn't create any new facts. They merely reaffirmed the longstanding principle that "[e]xcept for the requirement of being incurred in connection with a trade or business, a deduction under [section 212] is subject to all the restrictions and limitations that apply" (Reg. 111, § 29.23(a)-15(d) (1943)). This, by itself, necessarily applies the pre-opening expense doctrine to section 212.

Moreover, since Hardy involved tax year 1982, the DRA of 1984 couldn’t possibly have any application to that case.

This is exactly my point. Hardy's expenses were capitalized under longstanding principles, not under a provision of the DRA of 1984.

But what it would not catch is the net lease tax shelters – the Sec 212 activities that never anticipated being businesses. The people that wrote that report got all nervous because of the Hoopengarner decision and realized that things like net lease tax shelters, which weren’t businesses, would escape the capitalization clutches of Sec 195, and therefore, could immediately expense their pre-opening costs. So the drafters of the 1984 Senate Report laid down a command. They were careful not to “change” any definitions, as they wrote, “…intends that the definition of start-up expenditures be generally the same as under present law but clarifies the definition to cover certain pre-opening expenses.” And in doing so, they drew net leases into the picture, which we all know, are not trades or businesses.

If this was their motive and their intent in writing the Committee Report, then your argument would have some merit. But it's very difficult to read all of that in to the last sentence of the Committee Report when taken in context:

    Active trade or business means that the taxpayer is actively conducting a trade or business. This definition of active trade or business may include a trade or business that is in many respects passive. For example, a business where property is regularly based on a net lease basis is an active trade or business for this purpose.
This section of the report is clearly discussing what it means for a business to be "active". And as I've shown, there is nothing else in the legislative history or the case law that demands that we read further in to this statement than that.

But let's assume just for a moment that Congress did have the motive you say they did.

The decision in Hoopengarner was an outlier and a minority view. All Congress had to do was nullify Hoopengarner and that minority view would be extinguished. The only support taxpayers had at the time for currently deducting pre-opening net lease tax shelter expenses contrary to longstanding principles would be gone. No embellishments to the phrase "active trade or business" were needed to accomplish this goal, and as a bonus, doing it this way would also prevent taxpayers from amortizing their tax shelter pre-opening costs.

Finally, even if we ignore this point, we still have one more logical leap to make: "net lease" doesn't equate to "section 212 activity". See for example post #17 in this thread.

Is this history a mess of sloppiness? Sure is. We basically have a bare bones statute with certain critical pieces only to be found in competing Senate Reports. But we are left to make a judgement call.

We're only in that position of uncertainty and controversy if we begin with the belief that Congress was trying to force the capitalization of the pre-opening expenses of net lease tax shelters AND chose not to take the obvious route in doing so, and then look outwards from there.

Jeff, your position in our previous "lively discussion" was that a plain but highly technical reading of section 121(b)(3) should prevail, legislative history and IRS interpretation notwithstanding. You refused to consider less-than-obvious definitions of the terms "taxpayer" and "sale or exchange by the taxpayer" in spite of what Congress clearly intended for the section.

Now you are arguing from a polar opposite position. You refuse to follow the plain wording of section 195(c)(1)(A)(iii) and insist on a colored reading based on a portion of a single sentence in a Committee Report. You insist on a counter-intuitive definition of the term "active trade or business" based solely on your colored reading of that Report, even when we have an earlier Report from the people who came up with the phrase saying that's not what it means.

Could this be the cognitive dissonance of someone who is clinging to an irrational belief?
 

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Oh really?

The Senate just willy nilly, for no reason whatsover, decided to add a sentence about a non-trade or business? And another sentence that used the word “passive?” Do we ignore the fact that, to deal with tax shelters, the passive rules were later passed in 1986? There is no doubt that this tax sheltering was going on at the time of the 1984 DRA.

You insist on a counter-intuitive definition of the term "active trade or business"


What I insist on is an understanding of what went on at the time. It is very clear that Congress “thought” precisely what you have said: That other “stuff” causes pre-opening expenses of Sec 212 activities to be capitalized and non-amortizable. But then, and this is a big THEN…Hoopengarner came out. Whoa! That was a game changer. Congress then realized that what it “thought” about things, didn’t holding up in the Tax Court or in a higher court. They fix the Hoopengarner problem with the anti-Hoopengarner addition to Sec 195. But they realized, based on the way they crafted that provision, that this might not catch a 212 activity that always intended to be a 212 activity. They most certainly could have sat back and relied on the “other” stuff you speak of, but they weren’t so sure that would prevail, obviously, given the cloudy nature of the situation cast by Hoppengarner. So they made those statements in the 1984 Report. In their infinite wisdom, they more or less created this counter-intuitive definition of “active trade or business” – and yes, it is a definition I insist on, because I am forced to. Some refer to it as a technical correction by committee report. And in doing that, they expanded Sec 195 to catch the tax shelters of the world that weren’t trades or businesses, again, out of concern that these folks would still be able to immediately expense their pre-opening costs.

based solely on your colored reading of that Report


Oh, it’s not based on my colored reading of that Report. It’s based on my understanding, as explained above, as to what was happening at the time. You choose to ignore all of this and act like the addition of 1984 Report language was for no reason at all…The more intuitive thing to do would be to find the reason for the addition of that language. Only then does the Report make sense. Only then are things put into proper perspective. You have tackled this situation with no perspective, instead choosing to simply read words.

Jeff, your position in our previous "lively discussion" was that a plain but highly technical reading of section 121(b)(3) should prevail, legislative history and IRS interpretation notwithstanding. You refused to consider less-than-obvious definitions of the terms "taxpayer" and "sale or exchange by the taxpayer" in spite of what Congress clearly intended for the section


We were just trying to beat an accuracy related penalty there…

This is exactly my point. Hardy's expenses were capitalized under longstanding principles, not under a provision of the DRA of 1984.


My comment there was with respect to the court’s digression to the DRA of 1984 just so that it could say, “We have reconsidered Hoopengarner and we got it wrong.” It doesn’t matter if they got it wrong, because Congress had already acted via the Sec 195 addition. And it doesn’t matter what the court decided in Hardy, which involved 1982. And that’s because Congress later spoke, in 1984. That is, whatever cloud Hardy cleared up became moot when Congress, in 1984, expanded Sec 195 to cover Sec 212 activities via the Senate Report.

The clear “intent” of the 1984 Senate Report was to throw Sec 212 activities into Sec 195. Even though amortization would be allowed, over 60-months, that was certainly better than the possible alternative of an immediate expense.

Again, the real question is whether or not the 1984 Report language will have it’s intended (and fallout) effect. I think it will. Don’t get me wrong, I’m not a big fan of words in a statute not meaning what a plan reading would give us. The fact is, when Congress voted on the DRA of 1984, they didn’t vote on the Senate Report. But I know how things work in the courts, where the most painfully obvious thing, when read, is deemed ambiguous so we must look to other sources. I don’t like it and it’s a crappy way to legislate, but it is now so ingrained in our legal system that we can’t ignore it.
 

#31
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Jeff-Ohio wrote:The Senate just willy nilly, for no reason whatsover, decided to add a sentence about a non-trade or business? And another sentence that used the word “passive?” Do we ignore the fact that, to deal with tax shelters, the passive rules were later passed in 1986? There is no doubt that this tax sheltering was going on at the time of the 1984 DRA.

You relied on your theories about Congressional intent to prove that the sentences at the end of the report are with reference to non-trades or businesses, and now you're saying they must have had that intent because there are sentences with reference to non-trades or businesses. This is a circular argument.

You choose to ignore all of this and act like the addition of 1984 Report language was for no reason at all…The more intuitive thing to do would be to find the reason for the addition of that language. Only then does the Report make sense. Only then are things put into proper perspective. You have tackled this situation with no perspective, instead choosing to simply read words.

This is blatantly false. I offered an explanation in post #5 of the context surrounding the 1984 amendments, the language in the Committee Report, and the legal constraints the committee was faced with when setting forth their non-statutory technical correction. I did this before I ever started offering counter-arguments against your position. You claimed you read that post, and that it "gets into a bunch of nonsense that is irrelevant". Guess what: my nonsense is just as relevant as yours.

So here's what it comes down to: the basis for your argument is your "understanding, as explained above, as to what was happening at the time". I can't argue with your understanding. As you say, there were in fact tax shelters, and Congress did in fact want to do something about it.

What I can do is argue against the way you implement your understanding. When Senate Report 96-1036 references net leases, you want us to take the concept of net lease rentals out of the context of the very sentence it's placed in and place it fully in the context of Congress defeating tax shelters at all costs. And even though not all tax shelters are 212 activities, and indeed, not all net lease rentals are 212 activities, you want us to stretch our understanding on that point because that's what Congress would have wanted us to do based solely on your claims about their motive.

What I can also do is point out that my "understanding" is an equally plausible take on Congressional motive, but which, when applied to both the 1980 and 1984 Committee Reports and to section 195 itself, doesn't contradict anything, produce any interpretive dilemmas, or require any peculiar definitions.

There is no case law that specifically addresses either position. But there is, as you put it earlier, the "apple cart". There is doing what is plain and obvious and right in front of us. My position is clean and won't give rise to any uncertainty or controversy. It's better supported by what authorities we do have on the matter. It's the apple cart.

When the IRS offers our clients the ability to deduct "costs for setting up your business", we should do just that—no special understandings or interpretive constructs required.
 

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because that's what Congress would have wanted us to do based solely on what you say they were up to.


Oh, I can’t say that’s what Congress would have wanted us to do, but that’s where we end up only because they did it. I don’t think Congress was trying to do us any favors; they were trying to prevent something that was potentially unfavorable to the government.

And this is not based solely on what I say they were up to…it’s based on what others have said they were up to and it totally makes sense.

It is no wonder that the 1980 Report talked about a “significant furnishing of services” in the case of rental activities, yet the standard in the 1984 Report was “regularly [leased] on a net lease basis.” This was no accident. Bear in mind, many of these tax shelters involved personal property.

Chay says the 1984 drafters weren’t after anything here, they just inserted this stuff for the hell of it. It’s obvious why they inserted it. The fallout, which is the most important thing, is that they did insert it.

You continue to try to make distinctions between those things specifically identified in the 1984 Senate Report and those that weren’t specifically identified, arguing that Sec 195 now catches the former (if we accept the 1984 Senate Report as “law”), but not the latter. The professional community would say that is a highly nuanced and unsupportable distinction without a difference. They would say, as Hamill and Coddington have said, that the 1984 amendment changed the landscape across the board. And there is no case subsequent to that time that says anything different.
 

#33
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Jeff-Ohio wrote:Chay says the 1984 drafters weren’t after anything here, they just inserted this stuff for the hell of it.

Again, this claim is blatantly false. Not only did I never say that, I offered an explanation in post #5 of the context surrounding the 1984 amendments, the language in the Committee Report, and the legal constraints the committee was faced with when setting forth their non-statutory technical correction.

You continue to try to make distinctions between those things specifically identified in the 1984 Senate Report and those that weren’t specifically identified, arguing that Sec 195 now catches the former (if we accept the 1984 Senate Report as “law”), but not the latter.

When you argue that things should be caught which were not identified by any Senate Report, statute, or court case, you are making an argument for an expansion of the law by corollary. There is no legal basis for this.

Oh, I can’t say that’s what Congress would have wanted us to do, but that’s where we end up only because they did it.

If not for your justification based on Congressional intent, then how do we make the leap from net lease rentals to 212 activities? Not all net lease rentals are 212 activities. The only way would be to proceed by corollary, which again has no legal basis.

The professional community would say that is a highly nuanced and unsupportable distinction without a difference. They would say, as Hamill and Coddington have said, that the 1984 amendment changed the landscape across the board.

Invoking Hamill and Coddington is an argument from authority. All we should be concerned about is what can be said about this issue, not who is saying it.

As to the larger professional community: I've witnessed on this forum that there isn't a consensus there.

And this is not based solely on what I say they were up to…it’s based on what others have said they were up to and it totally makes sense.

Is this another argument from authority, or can you bring in some specific, credible commentary on the thinking behind the 1984 amendments to section 195?
 

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:roll: :roll: :roll: :roll: :roll: :roll: :roll:

Still chasing that pooka? You still have not mentioned an example of an expense to which all of this scholarly wisdom would be applied and I still can't think of one. Keep Reg. 1.212-1(b) and Code Section 197 in mind when you try to illustrate a case where any of this discussion matters. :? :? :? :? :?

I am starting to wonder if Jeff-Ohio, who is generally a pretty sensible guy, is just pulling our legs here by extending this line of thought.

§ 1.212–1 Nontrade or nonbusiness expenses.
(a) An expense may be deducted
under section 212 only if:
(1) It has been paid or incurred by the
taxpayer during the taxable year (i) for
the production or collection of income
which, if and when realized, will be required
to be included in income for
Federal income tax purposes, or (ii) for
the management, conservation, or
maintenance of property held for the
production of such income, or (iii) in
connection with the determination,
collection, or refund of any tax; and
(2) It is an ordinary and necessary expense
for any of the purposes stated in
subparagraph (1) of this paragraph.
(b) The term income for the purpose
of section 212 includes not merely income
of the taxable year but also income
which the taxpayer has realized
in a prior taxable year or may realize
in subsequent taxable years; and is not
confined to recurring income but applies
as well to gains from the disposition
of property.
Because on T.A. ten was the most you were allowed
 

#35
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you are making an argument for an expansion of the law by corollary.

Not really. The report said, “For example,” but only after the general statement that used the word “passive.” And the example they gave, in light of the history, was a 212 activity that never intended to be a 162 activity. If it did intend to be a 162 activity, it would already be covered by the new provision…the Senate Report commentary on which, preceding the two sentences in question. It’s pretty clear that those Senate Report sentences weren’t about that type of changed activity.

If not for your justification based on Congressional intent, then how do we make the leap from net lease rentals to 212 activities?


One way to make the leap is to seize on the word “passive,” just like Coddington did in that other thread, given the looseness we should attribute to the words “business” and “passive” in that sentence, especially since the passive loss rules weren’t even invented yet. The other way is as described above, seizing on the words, “For example,” and examining the type of activity they were talking about, so as to find parallels. Just because they only gave one firm example doesn’t mean that’s the only possibility, despite your Corollary Doctrine. The third way is to put the two together. The fourth way, if we must, is to seize on the words “similar expenditures” that were used in that section of the Report. And then, once we conclude, we might want to look to court cases that say something different, but we come up empty, as you well know. And yes, 35 years have gone by since the 1984 Act.

Your way is just too dicey. It enhances, not resolves, the consistency problem that Congress was attempting to address.

or can you bring in some specific, credible commentary on the thinking behind the 1984 amendments to section 195?

I sure could, if I felt like it. But you can do your own research. Seems that when I post credible commentary, at your request, you don’t like what you hear.

All we should be concerned about is what can be said about this issue, not who is saying it.

Then why did you make all those references to IRS Pubs and IRS Form Instructions? Seems you’re focus there was on who was saying it…
 

#36
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Jeff-Ohio wrote: If it did intend to be a 162 activity, it would already be covered by the new provision…the Senate Report commentary on which, preceding the two sentences in question. It’s pretty clear that those Senate Report sentences weren’t about that type of changed activity.

Or the sentences were simply clarifying the term "active". That's the nuance that flows in and out of the sentences while the term "business" or "trade or business" remains constant. You can't arrive at your conclusion that "business" doesn't mean "business" without pulling in theories about Congressional intent. The same is true about all the various words you want to seize on. If you want to push the line back a sentence from "net lease" to "passive", go right ahead. You still can't make the leap to "all section 212 activities" without bringing in some external justification.

Your way is just too dicey. It enhances, not resolves, the consistency problem that Congress was attempting to address.

It preserves the unequal footing for amortization that Congress originally intended. In all other aspects, my position maintains consistency between all the various Committee Reports and statutes involved. Yours doesn't do that.

Seems that when I post credible commentary, at your request, you don’t like what you hear.

I refuted your argument that the sources support your position, like I've been doing with your other arguments. If the possibility that I'll do so again is enough for you to withhold the commentary, it probably isn't that convincing.

All we should be concerned about is what can be said about this issue, not who is saying it.

Then why did you make all those references to IRS Pubs and IRS Form Instructions? Seems you’re focus there was on who was saying it…

I made those references to illustrate that my position is simpler and asks less of the practitioner and of the law itself. I think that's important to establish when there's ambiguity that must be resolved. You seemed to think the same thing at the end of post #20.
 

#37
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Tenletters wrote:Keep Reg. 1.212-1(b) and Code Section 197 in mind when you try to illustrate a case where any of this discussion matters.

I agree the fact pattern is highly unlikely, but it isn't hindered by Regs. 1.212-1(b) or section 197.

Section 197 deals with intangibles that are inherently capital in nature. The pre-opening expense doctrine applies to expenses that would be deductible but for the associated activity not yet being a going concern. As I understand it, the two are mutually exclusive.

Regs. 1.212-1(b) doesn't override the "carrying on" requirement that attaches to section 212 expenses by virtue of that section being construed in pari materia with section 162.

What I think hinders the fact pattern is mostly the sparse nature of a 212 activity. If there's a substantial pre-opening phase, the level of activity would point more towards a trade or business. If, as is typical for a 212 activity, there is not a lot of activity in the going concern phase, that would point towards a minimal or nonexistent pre-opening phase.

What's certain is that Congress did believe this fact pattern to be possible—it was cited as something that wouldn't qualify for a section 195 deduction in the 1980 Committee Report. What would it look like? Quite possibly like the scenario Jeff laid out in post #16.
 

#38
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You still have not mentioned an example of an expense to which all of this scholarly wisdom would be applied and I still can't think of one.


See Post #16. We are talking about costs incurred before an activity begins (i.e. pre-opening expenditures). They are usually the same type/class of everyday ordinary and necessary expenses, with the only difference being that the activity hasn’t yet commenced.
while the term "business" or "trade or business" remains constant


So what if the term remained constant. The way it is used is what matters.

You can't arrive at your conclusion that "business" doesn't mean "business" without pulling in theories about Congressional intent. The same is true about all the various words you want to seize on. If you want to push the line back a sentence from "net lease" to "passive", go right ahead. You still can't make the leap to "all section 212 activities" without bringing in some external justification.


If we need an external justification, just refer to what I have previously written. There is little doubt that the writers of the 1984 Senate Report wanted to “change” the way we were to understand the phrase “active trade or business.”

I refuted your argument that the sources support your position, like I've been doing with your other arguments.


You haven’t refuted anything. You simply provided a contrary opinion based on things you’ve read, with an absolute failure to put things into perspective based on what was happening, and what had happened, at the time.

I made those references to illustrate that my position is simpler and asks less of the practitioner and of the law itself.


And in illustrating your position, you posted several items and made note of who they were written by. Yet, when Jeff-Ohio makes reference to someone else who has provided input, that is somehow out of bounds and violates some axiom of Chay’s Rules of Debate. Further, the IRS Publication you cited doesn’t even define “active trade or business.” You are just assuming a definition; assuming that the words, when read by a layperson, will lead to a clear understanding of the matter. That would be a bad assumption (as it generally is with many IRS Publication excerpts). And, your position isn’t simpler, given that some 212 activities would be covered by 195 and some wouldn’t. And if that isn’t your position, if your position is that only businesses are subject to Sec 195 (aside from the anti-Hoopengarner addition to the Code, which of course throws a wrinkle into your Simplicity Theory), that sounds like it’s coming from someone who is either not paying attention or who simply refuses to add up all the little pieces to understand their collective significance.
 

#39
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Post #16 mentions a few depreciable assets which you will recover the cost of like you would any depreciable assets and one expense from a month before the taxpayer started investing that I can't think of any reason not to take in the year that it was paid under 1.212-1(b). That's what puzzles me about this whole discussion. It's like listening to an argument over whether unicorns really like to eat skittles.

“Your honor, I intended to engage in a Sec 212 activity involving the trading and holding of stocks and the collection of dividend income. I needed a few computers, a bunch of research materials, a telephone, some furniture and some office space. Before I bought 1 stock and moved everything into my new office space on July 1st, I paid the rent for June because I signed the lease on the June 1st effective date.”

Well ...

(b) The term income for the purpose
of section 212 includes not merely income
of the taxable year but also income
which the taxpayer has realized
in a prior taxable year or may realize
in subsequent taxable years
Because on T.A. ten was the most you were allowed
 

#40
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Tenletters wrote:I can't think of any reason not to take in the year that it was paid under 1.212-1(b)

I gave you a reason in post #37, Jeff concurred in #38. The pre-opening expense doctrine applies to both 162 activities and 212 activities. If the activity hasn't begun yet, there's no deduction. Section 1.212-1(b) was specifically used as justification for the ruling in Hoopengarner, but Hardy overturned that ruling.

Jeff-Ohio wrote:If we need an external justification, just refer to what I have previously written. There is little doubt that the writers of the 1984 Senate Report wanted to “change” the way we were to understand the phrase “active trade or business.”

You do need that justification to make your case about the meaning of "passive". There's no plain-language case for the last three sentences of the Committee Report doing anything other than discussing the term "active".

When we consider the greater context, we do find that there was some desire to expand the reach of the term "active trade or business", as you say. Between the two conflicting interpretations that we offer as to how and to what extent this was done, yours requires more logical leaps, is harder to support from a legal standpoint, conflicts with the plain language of the statute, and is outside the scope of the purpose for the amendment as stated in the Senate Report itself.

You simply provided a contrary opinion based on things you’ve read, with an absolute failure to put things into perspective based on what was happening, and what had happened, at the time.

Ok, let's go with that. I provided a contrary opinion to your arguments based on things I've read. That's still way different from me simply "not liking it".

On the failure to put things into perspective: this is the same blatantly false claim you made in post #30 and post #32. See my post #5, which you claim to have read. At least my opinions take into account the things I've read—yours appear to do that only when it's convenient.

Here's some more reading material:

    Start-up expenditures are amounts that would have been deductible as trade or business expenses, had they not been paid or incurred before business began
    (JCS-2-11 at 475; emphasis added)
This is from the March 2011 Blue Book, which counts as an authority under section 1.6662-4(d)(3)(iii). The wording is clear and requires no special context. It agrees with the 1980 Senate Report, the 1984 Senate Report, and the statutory language. It's quite recent, which means we should give it precedence under your logic.

All you've got is an argument about what the 1984 Report should say. When we read it like you want us to, it conflicts with everything besides your own opinion about what Congress must have been trying to accomplish.

And in illustrating your position, you posted several items and made note of who they were written by. Yet, when Jeff-Ohio makes reference to someone else who has provided input, that is somehow out of bounds and violates some axiom of Chay’s Rules of Debate.

You can reference whoever you want and say whatever you want about your source. If that amounts to an argument from authority, I'll say so. If I have a contrary opinion based on things I've read, I'll provide it.

You are just assuming a definition; assuming that the words, when read by a layperson, will lead to a clear understanding of the matter.

Sure, some average Joe doing his 1040 might not know or care what a "business" is in an income tax context, but any practitioner would have some idea. If the practitioner knows what a section 212 activity is, they'll know it isn't included in the concept.

And if that isn’t your position, if your position is that only businesses are subject to Sec 195 (aside from the anti-Hoopengarner addition to the Code, which of course throws a wrinkle into your Simplicity Theory), that sounds like it’s coming from someone who is either not paying attention or who simply refuses to add up all the little pieces to understand their collective significance.

Yes, that's my position. The only "simplicity" claim I'm making is that my position is simpler than yours. Yours requires a counter-intuitive definition of "active trade or business" based on implied, behind-the-scenes theories contradicted by multiple authoritative sources. This asks more of the practitioner and of the law.

By "all the little pieces", I don't see what you could mean besides the final two sentences of the 1984 Senate Report and the context they were written in. We've both been paying attention to those and adding them up for days now.
 

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