Free Trial: TheSiteFactory.com

Does Section 195 Apply to Section 212 Activities?

Technical topics regarding tax preparation.
#1
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
I have seen it asserted on this forum numerous times that "section 195 applies to section 212 activities".

Specifically, it is contended that the term "active trade or business" as used in section 195 applies equally to section 162 activities and section 212 activities. Coddington is the main purveyor of this position, and he has often stepped in to explain it using references to Hardy v. Commissioner, Toth v. Commissioner, and the committee reports on section 195. See for example this thread: viewtopic.php?f=8&t=14685.

I am highly skeptical of this position, and I intend to offer arguments against it in this thread. Before I do that, I'd like to make sure that I have a complete understanding of the arguments in support of the position.

I have attempted to clearly articulate Coddington's arguments in the four points that follow. I'd like to invite Coddington, or indeed anyone else familiar with any arguments for the application of section 195 to section 212 activities, to examine the following four points and suggest any citations, clarifications, or additional reasoning that will bolster them. If there are additional arguments, please suggest those as well. Put forward the best possible case for the position I intend to dispute:

  1. The intent of the 1984 amendment to section 195 was to make clear that the pre-opening expense doctrine applied to section 212 activities just as much as it did to section 162 activities. Therefore, this amendment should be interpreted to cause pre-opening expenses for section 212 to be capitalized, and if they are capitalized under section 195, they can therefore be amortized under that section.
  2. The senate committee report on The Deficit Reduction Act of 1984, which added section 195(c)(1)(A)(iii), states that a trade or business that is "in many respects passive" can nevertheless be considered an "active trade or business" for purposes of section 195. The report goes on to provide the example of a net lease rental activity being considered active even though it is seemingly passive. Because net lease rental activities are section 212 activities, we can conclude that the senate report was discussing section 212 activities when they discussed "passive" trades or businesses. Therefore, the senate intended that a section 212 activity can be considered a section 195 "active trade or business".
  3. An equivalency standard between section 162 and section 212 was announced in Hardy v. Commissioner (93 T.C. 684) and confirmed in Toth v. Commissioner (128 T.C. 1). In the words of the Hardy court, "[s]ection 162 and section 212 are in pari materia as to the distinction between capital expenditures and ordinary expenses". Section 162 start-up expenditures are capitalized under section 195. Because section 212 expenses are treated equivalently, this means they, too, are capitalized under section 195. If they are capitalized under section 195, they can therefore be amortized under that section.
  4. Although divergent from the plain reading of the statute, section 195(c)(1)(A)(iii) can be interpreted to include section 212 activities within the definition of an "active trade or business", and that is the interpretation that the Toth and Hardy courts, as well as the legislative history of the section, have confirmed for us.
 

#2
Coddington  
Moderator
Posts:
2014
Joined:
21-Apr-2014 8:50pm
Location:
Fort Worth, TX
That's an exceptionally fair presentation. Is the TCJA the motivation for for this discussion?

As we all know, the TCJA added Code section 67(g), which suspended section 212 deductions for eight years (not counting deductions under section 62(a)(4)). If an activity passes through an active section 212 stage in anticipation of an eventual section 162 stage, the plain reading of section 195(c)(1)(A)(iii) would seem to permit require capitalization of the section 212 expenses for later deduction or amortization under section 195 once the active section 162 trade or business commences. Thus we avoid the suspension of section 212 deductions. Before continuing the discussion, it would probably be useful (for others) for us to briefly describe the facts of the relevant cases.

1. Hoopengarner involved the 1976 tax year. The taxpayer acquired a leasehold interest on which to construct building. He tried to deduct the 1976 rental payments to the ground lessor. Construction commenced and finished in 1977. The first tenant took possession in September 1977. The Tax Court found that the property was held for the future production of income in 1976 and thus held the pre-opening expenses were not deductible under section 162, but were deductible under section 212(2).

2. In Hardy, the Tax Court overruled Hoopengarner. Hardy involved a taxpayer who held down a full-time government job, but also managed 45 rental homes. Of those homes, he had an equity interest in only one. He deducted loan fees on his 1982 return related to an attempt to enter the hotel business. The Tax Court found that he was not in the hotel or commercial leasing business. This relegated the attempt to a pre-opening situation and the Court held that pre-opening doctrine applied to section 212 as well as section 162. The deductions were denied.

3. In Toth, the taxpayer conceded that her activities in 1998 and 2001 were not section 162 activities, but rather section 212. So there are minimal facts in the opinion. All we know is that the taxpayer was already qualified to teach certain horse eventing skills, but held down a full-time job with Pfizer. In 1998, while still working for Pfizer, she started the horse training and boarding activities, which resulted in a small income. (She lost her job with Pfizer in 2000.) By 2004, the active trade or business under section 162 had commenced.

Two possible attacks on my position are that the plain-meaning of section 195(c)(1)(A)(iii) precludes the holding in Toth or that section 195's "start-up expenditures" do not include section 195(c)(1)(A)(iii) "start-up expenditures", (though I am curious to see if Chay takes another route). In the first case, Toth is wrongly decided. What then? Is there another decision on point that would elevate the contrary position to MLTN or substantial authority? In the second case, we don't have ammo against the TCJA suspending deductions.

There is a pretty good article that covers more of the theory involved in this area here
-Brian
Tax accounting methods and credits consultant for hire.

http://www.coddingtontax.com
 

#3
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Coddington, thank you for the summaries and the links to the relevant cases. Those will help with the discussion.

As a matter of fact, the TCJA has nothing to do with my arguments. I agree with the Toth court's holding that once a section 212 activity has begun, "the deduction of ordinary and necessary expenses paid or incurred in that activity is not precluded by section 195 regardless of whether that activity is subsequently transformed into a trade or business" (128 T.C. at 4). The key phrase that requires this treatment is "in anticipation of such activity becoming an active trade or business". This phrase means that in the case of an ongoing 212 activity, only where the a taxpayer has expenses related specifically to the transformation of that activity into a 162 activity does that taxpayer have "start-up expenditures". The only way for such a taxpayer to get around the section 67(g) limitation is for them to actually start up a bona fide "trade or business", which is very much in line with the intent of the TCJA.

Nor do I contend that section 195(c)(1)(A)(iii) expenses do not fit within the definition of "start-up expenditures". Indeed, section 195(c)(1), drawing on all three clauses of subparagraph (A), sets forth the very definition of "start-up expenditures".

It is in fact my contention that the term "active trade or business" as used in section 195 applies only to section 162 activities and not to section 212 activities.

In support of this contention, I will first show that it was explicitly the intent of the Congress to exclude section 212 activities from the benefits of section 195 when they first enacted that section in 1980. I will then show, contradictory to point 2 in post #1, that their intent to exclude section 212 activities did not change, and was in no way defeated, when the 1984 amendment was made in response to the Tax Court's findings in Hoopengarner. Finally, I will show that points 1, 3 and 4 of post #1 misinterpret both section 195 as written and the court holdings subsequent to the 1984 amendment. In so doing, I will offer better interpretations of what the statute and the case law imply.

In the interest of good inquiry, organization, and adhering to a discussion format, I will address each of these three points separately and in order. For anyone reading, if you have any questions, comments, support, or counter-arguments, please post these without waiting for me to move on to my next point. This will allow us to fully address all ideas as they arise and it will potentially allow me to incorporate more detail or nuance into my arguments.
 

#4
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Point 1 — The original version of section 195 clearly and deliberately excludes section 212 activities

In arguing this point, it is tempting for me to resort immediately to committee reports that state what the legislative intent was. However, doing so would cloud our ability to focus the discussion on the plain meaning of this statute, and in the end, it is that meaning which matters more than anything else. As the Supreme Court put it, "where the language of an enactment is clear and construction according to its terms does not lead to absurd or impracticable consequences, the words employed are to be taken as the final expression of the meaning intended" (United States v. Missouri Pacific R. Co., 278 U.S. at 278).

So I will approach things "the hard way" and begin by introducing the text of section 195 as it was originally enacted in 1980, available here and copied below:

Code: Select all
SEC. 195. START-UP EXPENDITURES.
   (a) ELECTION TO AMORTIZE.—Start-up expenditures may, at the
election of the taxpayer, be treated as deferred expenses. Such
deferred expenses shall be allowed as a deduction ratably over such
period of not less than 60 months as may be selected by the taxpayer
(beginning with the month in which the business begins).
   (b) START-UP EXPENDITURES.—For purposes of this section, the
term 'start-up expenditure' means any amount—
        (1) paid or incurred in connection with—
             (A) investigating the creation or acquisition of an active
         trade or business, or
             (B) creating an active trade or business, and
        (2) which, if paid or incurred in connection with the expansion
     of an existing trade or business (in the same field as the trade or
     business referred to in paragraph (1)), would be allowable as a
     deduction for the taxable year in which paid or incurred.
   (c) ELECTION.—
        (1) TIME FOR MAKING ELECTION.—An election under subsection
    (a) shall be made not later than the time prescribed by law for
    filing the return for the taxable year in which the business
    begins (including extensions thereof).
        (2) SCOPE OF ELECTION.—The period selected under subsection
    (a) shall be adhered to in computing taxable income for the
    taxable year for which the election is made and all subsequent
    taxable years.
      (3) MANNER OF MAKING ELECTION.—An election under subsec-
    tion (a) shall be made in such manner as the Secretary shall by
    regulations prescribe.
   (d) BUSINESS BEGINNING.—For purposes of this section, an
acquired trade or business shall be treated as beginning when the
taxpayer acquires it.

Take note of the fact that the current section 195(a), disallowing deductions for start-up expenditures outside of section 195, is missing from this version, as is the language in 195(c)(1)(A)(iii) relating to activities for profit or for the production of income. Both of these differences are material to this discussion and will come into play later.

Also take note of the magic words "trade or business", which appear five times and are traded for the lone word "business" on two further occasions.

The phrase "trade or business" was introduced in the Revenue Act of 1918 and has remained a staple of income tax law ever since (see Higgins v. Commissioner, 312 U.S. at 215). The phrase has, apparently, been used in more than 60 different Code sections since at least 1960 (try googling the phrase "60 different Code sections" in quotation marks). Often, these various sections, or the regulations thereunder, will explicitly cross-reference section 162 for their definition of "trade or business" (e.g., sections 41, 179, 513, 1402, 1411, etc.), and it is beyond dispute that in most cases, when "trade or business" is spoken, section 162 (and no other section) has been invoked.

However, the fact that there are so many explicit references may lead one to question whether, in the case where a cross-reference does not exist, a different meaning was intended.

Generally, we will find this not to be the case. Courts have favored applying a consistent definition of "trade or business" across the various statutes so long as the purpose of the statutes is similar (see Folker v. Johnson, 230 F.2d 906). However, in some cases, we are presented with embellishments to the phrase "trade or business" that seem to point more strongly to a new concept with a different meaning from the one in section 162. In these cases, courts have been more reluctant to rely solely on prior case law (see for example King v. Commissioner, 55 T.C.677, regarding section 355 and "active conduct of a trade or business").

As it happens, section 195 lacks a cross-reference to section 162 while also containing the phrase "active trade or business", which could be argued as an example of an embellishment and a new concept. On these facts we could base an argument that the language of this enactment is not clear and that it cannot be relied upon as the sole source of interpretation. Depending on what else we draw upon to clarify the ambiguity, we could even go so far as to argue for the inclusion of a section 212 activity within the new concept of "active trade or business".

All of that would be folly.

For one thing, the term "active trade or business" in section 195 does not strongly suggest a new and therefore ambiguous concept. "Active" is only inserted in front of "business" or "trade or business" in two out of seven occasions, suggesting that the phrase in its normal presentation is controlling in this section. Even where the term "active trade or business" is used, the plain term "trade or business" is then substituted immediately thereafter (195(b)(2)) to refer to the same thing. This suggests that, whatever an "active trade or business" might be, it is also a trade or business.

But assuming arguendo that we do have a new concept in the phrase "active trade or business", that concept cannot be completely detached from section 162, and will in fact represent a narrowing, rather than a broadening of the original definition. The meanings conveyed by the various "trade or business" phrases found throughout the Code do not differ in their comprehension of what a "trade or business" itself is, but rather in the criteria through which these activities are to be evaluated in the context of the relevant section. See for example Regs. 1.41-2(a), emphasizing that a trade or business must be carried on at the time an expense is paid. Regs. 1.355-3(b)(2)(ii) is the closest we come to a genuinely distinct concept of a "trade or business". The definition offered here appears to conflict with case law because it pays no attention to the level of activity involved in the "group of activities" carried on by the corporation. But this definition cannot be applied without also incorporating the (b)(2)(iii) requirement for "active and substantial management and operational functions", which leads us, again, to a definition that is narrower than the one in section 162.

Even if we move past both of these points and contemplate broadening the definition of "trade or business", we will find it unnatural to stretch that definition to encompass section 212 activities. Section 23(a)(2), the predecessor to section 212, was added to the Code in 1942 with the sole purpose of allowing taxpayers not engaged in a trade or business, but having expenses that would otherwise meet the criteria for business deduction, including profit motive, to deduct those expenses. This purpose is expressed nowhere more clearly than in the regulations under that original section: "Except for the requirement of being incurred in connection with a trade or business, a deduction under this section is subject to all the restrictions and limitations that apply in the case of the deduction under section 23(a)(1)(A) of an expense paid or incurred in carrying on any trade or business" (Reg. 111, § 29.23(a)-15(d) (1943)). Because the very identity of section 212 activities emerges in opposition to trade or business activities, trying to include them in the scope of the term "trade or business" used in any context would be like trying to blend oil and water.

As it happens, the Tax Court did try to do just that on one occasion: Smith v. Commissioner (17 T.C. 136). Their holding that the petitioner could deduct a loss from an investment in a corporation as a business bad debt took the concept of a business and made it, in the words of the dissenting opinion, "extended entirely too far". The dissenting opinion goes on to argue that Congress has never intended to broaden the concept of a trade or business. It argues that in light of the recent addition of the new class of non-trade and non-business activities, where reference to such activities is absent, it is intended for such activities to be specifically excluded from consideration. The IRS appealed, and the majority opinion was overturned based on the dissenting opinion (Commissioner v. Smith, 203 F.2d 310).

In the original version of section 195, we have another example of deductions afforded to a "trade or business" wherein any reference to a mere income-producing activity is absent. Given the greater context of the Code, these phrases, and their interpretation, that fact alone is sufficient to conclude that section 162 activities are included in, while section 212 activities are excluded from, amortization under the original version of section 195, and also that this was done deliberately.

But in case there is any controversy left about the original intent behind the statute, I will now conclude with an excerpt from Senate Report 96-1036 (available here) explaining section 195:

    Trade or business requirement
    Expenditures must relate to the investigation or creation of an active trade or business (within the meaning of Code sec. 162). Thus, expenditures attributable to an investment are not eligible for amortization under this provision. For this purpose, an activity with respect to which expenses are deductible only as itemized deductions for individuals (Code sec. 212) is not considered to be a trade or business.
This committee report is clear enough that I could have relied mostly on it to illustrate the original intent and effect of section 195. But by emphasizing statutory construction instead, I have shown not only in an alternative fashion what that intent was, but also that the intent is decisively and unambiguously reflected in the law itself. Thus, in order to defeat this intent, it would require something more than a mere added nuance or judicial intervention.
 

#5
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Point 2 — The 1984 amendments did not cause section 212 activities to be included, nor were they intended to

I have already shown that section 195 was originally inapplicable to section 212 activities, and that this was deliberately so. You will now see that the 1984 amendments did not extend the section to cover such activities, and moreover that they were not intended to.

As before, I'll start from the plain language of the statute. I've reproduced the 1984 version (available here) with [[double brackets]] showing where substantive language was added, and XXdouble x'sXX showing where there was a substantive deletion of language:

Code: Select all
SEC. 195. START-UP EXPENDITURES.
   [[(a) CAPITALIZATION OF EXPENDITURES.—Except as otherwise pro-
vided in this section, no deduction shall be allowed for start-up
expenditures.]]
   (b) ELECTION TO AMORTIZE.—
        (1) GENERAL.— Start-up expenditures may, at the election
   of the taxpayer, be treated as deferred expenses. Such
                                                 [[prorated equally]]
   deferred expenses shall be allowed as a deduction XXratablyXX over
   such period of not less than 60 months as may be selected by the
   taxpayer (beginning with the month in which the [[active trade
   or ]]business begins).
        [[(2) DISPOSITIONS BEFORE CLOSE OF AMORTIZATION PERIOD.—In
   any case in which a trade or business is completely disposed of
   by the taxpayer before the end of the period to which paragraph
   (1) applies, any deferred expenses attributable to such trade or
   business which were not allowed as a deduction by reason of
   this section may be deducted to the extent allowable under
   section 165.]]
   (c) DEFINITIONS.—For purposes of this section—
        (1) START-UP EXPENDITURES.—The term 'start-up expenditure'
   means any amount—
             (A) paid or incurred in connection with—
                  (i) investigating the creation or acquisition of an active
             trade or business, or
                  (ii) creating an active trade or business, [[or
                  (iii) 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,]] and
                                                              [[operation]]
        (2) which, if paid or incurred in connection with the XXexpansionXX
   of an existing [[active]] trade or business (in the same field as the trade or
   business referred to in subparagraph (A)), would be allowable as a
   deduction for the taxable year in which paid or incurred.
[[The term 'start-up expenditure' does not include any amount
with respect to which a deduction is allowable under section
163(a), 164, or 174.]]
        (2) BEGINNING OF TRADE OR BUSINESS.—
             [[(A) IN GENERAL.—Except as provided in subparagraph
         (B), the determination of when an active trade or business
         begins shall be made in accordance with such regulations as
         the Secretary may prescribe.]]
             (B) ACQUIRED TRADE OR BUSINESS.—An acquired [[active ]]
         trade or business shall be treated as beginning when the
         taxpayer acquires it.
   (d) ELECTION.—
        (1) TIME FOR MAKING ELECTION.—An election under subsection
    (b) shall be made not later than the time prescribed by law for
    filing the return for the taxable year in which the [[trade or ]]business
    begins (including extensions thereof).
        (2) SCOPE OF ELECTION.—The period selected under subsection
    (b) shall be adhered to in computing taxable income for the
    taxable year for which the election is made and all subsequent
    taxable years.
      XX(3) MANNER OF MAKING ELECTION.—An election under subsec-
    tion (a) shall be made in such manner as the Secretary shall by
    regulations prescribe.XX

Most of the changes indicated are either extraneous to this discussion or depend on the definition of "trade or business" or "active trade or business". I therefore submit that only two changes could possibly be argued as broadening the scope of section 195: the insertion of the phrase "active trade or business" more frequently, and section 195(c)(1)(A)(iii) (hereinafter, "(1)(A)(iii)"), providing that certain expenses in connection with section 212 activities are considered start-up expenses.

The activities referred to in (1)(A)(iii) are clearly section 212 activities. However, the clause does not state that section 212 activities are to be included in the concept of an "active trade or business", nor does it offer the activities as an alternative to such concept (e.g., by introducing a term such as "active investment activity"). Rather, it provides for the inclusion of expenses related to a section 212 activity specifically in the case where the activity will later become an "active trade or business".

If "trade or business" or "active trade or business" indeed refers to section 162 activities as I have argued, then this clause merely asserts that the pre-opening phase to a section 162 activity can occur in the period before a section 212 activity transforms into such activity, and that expenses related to that transformation should be considered start-up expenditures. It makes no claim about the pre-opening phase of a section 212 activity unless we assert that "trade or business" in this context already refers to the section 212 activity, and that such activity must enter its active phase. Arguing for a new concept of an "active trade or business" is not sufficient; the term "trade or business" itself must include mere investment activities in order to proceed.

As I showed in point 1 above, this is an inherently unnatural proposition. Moreover, the proliferation of the phrase "active trade or business" in this section due to the amendments pushes us further toward an analysis of that phrase as a whole concept rather than an example of something being called "active" and happening to be referred to as a "trade or business" at the same time. More importantly, we haven't explained why Congress would choose such an inscrutable method to pull in section 212 activities when previously, the exclusion of those activities was so clearly the intent of this section. Why wouldn't they insert an explicit provision for 212 activities like they did with section 167(a)(2)?

The alternative argument, which is that "active trade or business" is a new concept in light of its more frequent appearance, and that such concept is broad enough to include section 212 activities, is actually defeated by (1)(A)(iii). If "active trade or business" as a whole term could already be used to refer to section 212 activities, then it would make no sense for (1)(A)(iii) to hinge on the transformation of a section 212 activity into an "active trade or business". Without opposition to the word "active" specifically, there is no reason to think the activity referred to in the first part of (1)(A)(iii) has not already begun, especially given the words "engaged in". If such activity is already included in the scope of an "active trade or business", then how can there be a transformation from the one to the other? We need to interpret "active trade or business" as exclusive of section 212 activities for this transformation to make sense.

For these reasons, section 195 as written continues to project the original intent of the Congress that drafted it, and the section simply cannot be read to incorporate section 212 activities. But did Congress intend for it to be read that way?

In the years following the original enactment of section 195, two things happened.

First, The Economic Recovery Tax Act of 1981 (ERTA) was passed into law. This act is still considered to be the greatest federal tax cut in U.S. history (see the OTA working paper on this here with updated tables here; the TCJA did not come close to topping the highest figures listed). The ERTA also inserted indexing for inflation, and so the era of constant bracket creep was over. Congress thus began looking for ways to raise revenue instead of lower it (the OTA working paper contains a good analysis of this on pages 4-5).

Second, Hoopengarner v. Commissioner (80 T.C. 538) was decided. In this case, the Tax Court held that the pre-opening expense doctrine did not override section 212 (supra, at 543) for two reasons: 1) that expenses necessary to the formation of a business venture were not capital for that reason alone, and 2) that the pre-opening doctrine was only useful as a criterion for evaluating deductions under section 162. Taxpayers now had support for the current deduction under section 212 of a wide variety of expenses that Congress, in its enactment of section 195, did not believe were deductible (see the 1980 Committee Report, first disclaiming that pre-opening expenses were incurred in an income producing activity, then framing start-up costs as incurred for the creation of a business).

Both of these events influenced the enactment of the section 195 amendments as can be seen in Senate Report 96-1036. First and foremost, the Hoopengarner decision led to the transformation of this section into a capitalization provision (via section 195(a)) that specifically targeted Hoopengarner-like expenses (via (1)(A)(iii)). Any argument about the scope of capitalization or of the pre-opening expense doctrine was now moot due to specific statutory language. Second, the fact that section 195 could now serve to deny deductions gave the post-ERTA Congress, in search of revenue, a motive to broaden the range of activities to which it could apply—to a certain extent.

A "Hoopengarner-like expense" is one associated with investments that are held with the aim of establishing a business as a going concern - or in the words of section 195, an "active trade or business". Logically, in order to increase revenue, Congress would want to lower the threshold of what could be considered an "active trade or business" so that only the slightest input of effort on the part of the taxpayer would be enough to cross the threshold and subject the efforts of the taxpayer in developing his investments to capitalization and deferred deduction. They would want to stop short, however, of actually including those investments in the definition of "active trade or business". Not only would this render the "transformation from the one to the other" meaningless, as discussed above, it would allow more types of expenses to be deducted under the amortization provision, thus decreasing revenue. As we shall see, Congress behaved exactly as we would expect.

As we have seen, the phrase "active trade or business" was not actually defined in the original section 195. In keeping with the tradition of avoiding statutory definitions of a "trade or business", the 1980 Congress instead offered guidance via the Committee Reports. All it would take, then, to influence the definition of "active trade or business", would be more guidance from Committee Reports.

That guidance came at the very end of Senate Report 96-1036:

    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 guidance is in stark contrast to what was in the 1980 Committee Report regarding rentals:

    Further, in the case of rental activities, there must be significant furnishing of services incident to the rentals to constitute an active business (within the meaning of Code sec. 162) rather than an investment.
Interestingly, there is no mention of this contrast in the 1984 Committee Report—it's almost as though Congress is trying avoid calling attention to it. Undoubtedly, they were being mindful of the fact that their report could not become a part of the legislative history of the previous enactment, and could only be given "some consideration as a secondarily authoritative expression of expert opinion" (Bobsee Corporation v. United States, 411 F.2d at 237). Their approach had to be one of examining the "trade or business" threshold from a different angle and hoping their emphasis would be given more weight.

The 1984 report's reference to a "business where property is regularly based on a net lease basis" is evocative of the petitioners' business in King v. Commissioner (458 F.2d 245). In this case, the Sixth Circuit overturned the Tax Court's opinion that the petitioners were not engaged in the active conduct of a trade or business (within the meaning of section 355) based in part on the fact that they rented property on a net lease basis. Because there was a valid business reason for the net leases, and because they were accompanied by extensive acquisition, financing, and construction activities, it was held that although the net lease rentals were "pure passive income without concomitant expenditure of money or effort on the part of the lessor" (supra, at 248), they nevertheless amounted to the active conduct of a trade or business.

By making section 195 applicable to situations such as that in King, the 1984 Congress advanced an alternative theory of the trade or business threshold that diminished, but did not directly contradict, the words of the 1980 Committee Report. That report wanted significant services to be furnished, but it did not specify the exact nature or level of services, nor to whom they should be provided. Thus, the 1984 Congress was able to broaden the definition of "active trade or business" as much as it could without actual statutory intervention.

Point 2 in post #1 argues that the insertion of a "passive" net lease into the concept of "active trade or business" had the effect of stretching that term to cover all section 212 activities. This position discounts the presence of "passive" net leases in the active conduct of a trade or business such as in King, and as we have seen, Congress did not have a motive to try to incorporate section 212 activities anyways. Moreover, even if they had wanted to, Congress could not have incorporated section 212 activities in a mere committee report. Not only would such an attempt fail to directly reverse the intent of the 1980 law and its statutory language, it would have, if successful, rendered the (1)(A)(iii) concept of transformation meaningless.

A more sensible position is that while the Committee Report's analysis did broaden the scope of the term "active trade or business", it only did so to the extent that the line separating it from section 212 activities was not crossed.
 

#6
Coddington  
Moderator
Posts:
2014
Joined:
21-Apr-2014 8:50pm
Location:
Fort Worth, TX
Chay,

I've been looking forward to reading your arguments. Conceptually, I think your idea of restricting section 195 treatment to the transformative costs of moving a section 212 activity to a section 162 trade or business is beautiful, (though I do not know how to differentiate them from deductible business expansion costs within an existing section 162 business). Your idea provides an elegant solution to a difficult interpretive matter. While you were working on this, however, a new case came out:

Respondent also argued that petitioners' 2009 rental expenses with respect to the Idaho property are startup expenditures under section 195 and must be capitalized. HN12 A startup expenditure is any amount paid or incurred in connection with investigating the creation or acquisition of an active trade or business; creating an active trade or business; or 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's becoming an active trade or business, which, if paid or incurred in connection with the operation [**34] of an existing active trade or business, would be allowable for that taxable year. Sec. 195(c)(1).

[*35] HN13 Section 195 applies to both section 162 activities and section 212 activities. Toth v. Commissioner, 128 T.C. 1, 4 (2007); Hardy v. Commissioner, 93 T.C. 684, 692-693 (1989); see sec. 195(c). Rental activity must have commenced in order for related expenses to be considered ordinary and necessary. See Charlton v. Commissioner, 114 T.C. 333, 338 (2000); Woody v. Commissioner, T.C. Memo. 2009-93, 2009 WL 1230790, at *4, aff'd, 403 F. App'x 519 (D.C. Cir. 2010).

Even accepting respondent's premise that renting the Idaho property to vacationers was a new business distinct from their earlier 2009 rentals to the Bittons and Black Tip Supply, we have found that the Bittons and Black Tip Supply rented the Idaho property for a substantial part of 2009, and petitioners offered the property as a vacation rental in late 2009. We therefore conclude that petitioners' 2009 rental costs incurred were deductible rental expenses to the extent substantiated (and subject to the limits under section 469). See Charlton v. Commissioner, 114 T.C. at 338 (holding that the taxpayers' costs were startup expenditures because they did not at least offer the properties for rent).


Rose v. Comm'r, T.C. Memo 2019-73, 34-35, 2019 Tax Ct. Memo LEXIS 76, *33-34 (T.C. June 13, 2019) (emphasis mine).

In this case, we are confronted with what could be called "transformative costs" when the taxpayer changed their rental to a VRBO. The Tax Court judge didn't bite on that argument. We also have a blunt statement that section 195 applies to both section 212 and section 162 activities.
-Brian
Tax accounting methods and credits consultant for hire.

http://www.coddingtontax.com
 

#7
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Well...the wording in that opinion is certainly unfortunate given the title I chose for this thread.

But I did clarify what I meant by that early in post #1:

Chay wrote:Specifically, it is contended that the term "active trade or business" as used in section 195 applies equally to section 162 activities and section 212 activities.

And I don't think the Tax Court judge's statement (which I would describe as "lacking in detail" rather than "blunt") is enough to support that particular assertion without examining the two cases she cited, which I was planning on doing anyways. In brief, the position I will argue in point 3 is that section 195 only "applies to" section 212 in the sense that incurring an expense within the context of a section 212 activity does not by itself allow that expense to escape the pull of section 195(a) or of the underlying pre-opening expense doctrine.

Also, while I am very hesitant to question the competence of a judge, I can't help but notice the following on page 25:

A passive activity is any activity involving the conduct of a trade or business--or an income-producing activity--in which a taxpayer does not materially participate. Id. subsec. (c)(1), (6)

The judge is thrusting all income-producing activities under the scope of section 469, but that is not how I read the law. I provided an analysis in an earlier thread:

Chay wrote:To be subject to the "usual" PAL rules, an activity must involve the conduct of a trade or business (§469(c)(1)(A)). For these purposes, a "trade or business" includes any activity with respect to which expenses are allowable as a deduction under section 212, but only to the extent provided in regulations (§469(c)(6)). The regulations under section 469 provide that trade or business activities are defined in § 1.469-4(b)(1) (§§ 1.469-1T(e)(1) and -1(e)(2)), and when we look at the named section, we find that the definition applies to activities that:

  1. Involve the conduct of a trade or business (within the meaning of section 162);
  2. Are conducted in anticipation of the commencement of a trade or business; or
  3. Involve research or experimental expenditures that are deductible under section 174 (or would be deductible if the taxpayer adopted the method described in section 174(a)).

Am I missing something big here? If not, the judge's statement is at best very misleading, casting doubt on any other brief, sweeping assertions in this opinion, such as "[s]ection 195 applies to both section 162 activities and section 212 activities".

As to transformative costs in Rose: the Tax Court accepted (in an arguendo sort of way) the existence of a pre-opening phase for a new business activity based on the same rental property already in use. The IRS lost on the section 195 issue not because capitalized transformative costs could not exist, but because the proposed pre-opening phase would not have captured any of the expenses from the previous activity, and the proposed new "active trade or business" was already underway by the end of 2009.
 

#8
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
Chay, where are you going with all of this?

Is it your position that Sec 195 doesn’t apply, at all, to Sec 212 activities (in terms of pre-activity commencement expenses)?

Or, is it your position that Sec 195 does apply to 212 activities in terms of capitalization (of pre-activity commencement expenses), but if the Sec 212 activity remains a Sec 212 activity, no amortization is allowed of those pre-activity commencement expenses?

Toth wasn’t really about pre-activity commencement expenses. In Toth, we had an ongoing Sec 212 activity. The IRS said, “Wait a minute. Even though the taxpayer had an ongoing 212 activity, since the taxpayer anticipated that that activity would be a full-fledged operating business, all the ongoing expenses should be capitalized under Sec 195 based on (C)(1)(A)(iii).”

The judge didn’t buy this argument. The judge basically said that Sec 195 has no application to expenses incurred in an ongoing (i.e. up and running) activity, be it a Sec 212 activity or not. As the judge said:

This Court will not interpret section 195 to override the deductibility of ordinary and necessary expenses petitioner incurred in an ongoing section 212 activity any more than it would do so for an ongoing section 162 activity

But this is all about an “ongoing” Sec 212 activity. And it clearly resolves that issue, IMO.

In my mind, the issue at play relates to pre-activity commencement expenses with respect to a Sec 212 activity. Old case law said that Sec 195 didn’t apply to such expenses, so people were just expensing them outright. New law says that Sec 195 does apply to those expenses, at least in terms of capitalization. In terms of amortizing those expenses, maybe Chay is saying we can’t do that because the “active trade or business” requirement of 195(b)(1)(A) hasn’t been met? That seems kind of odd to me, given that all this stuff about an “active trade or business” (or the anticipation of ultimately entering into one) was largely dispatched with by the judge in Toth. It seems to me that once the Sec 212 activity has been entered into, the capitalized Sec 195, pre-activity commencement costs can be amortized. This achieves the parity that has been talked about so much surrounding this issue. In other words, the words “active trade or business,” as we see them in Sec 195, don’t really mean that…and I believe this is what Coddington’s position has been all along.
 

#9
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Jeff-Ohio wrote:Is it your position that Sec 195 doesn’t apply, at all, to Sec 212 activities (in terms of pre-activity commencement expenses)?

Or, is it your position that Sec 195 does apply to 212 activities in terms of capitalization (of pre-activity commencement expenses), but if the Sec 212 activity remains a Sec 212 activity, no amortization is allowed of those pre-activity commencement expenses?

My position is close to the first thing you said, but there's a little more to it.

I agree with the original drafters of section 195, who believed that pre-opening expenses were inherently capital. The Tax Court was fundamentally wrong in Hoopengarner when they held that expenses could be deducted under section 212 when they would clearly not be deductible under section 162 assuming the "trade or business" requirement had been met. That requirement was meant to be the only distinguishing factor between the two sections.

So, while it is my position that section 195 doesn't apply to pre-activity commencement expenses of a section 212 activity, that doesn't mean I believe that such expenses are deductible. They are capitalized under the same theories that used to cause section 162 pre-opening expenses to be capitalized before section 195(a) was added.

Jeff-Ohio wrote:Toth wasn’t really about pre-activity commencement expenses. In Toth, we had an ongoing Sec 212 activity. The IRS said, “Wait a minute. Even though the taxpayer had an ongoing 212 activity, since the taxpayer anticipated that that activity would be a full-fledged operating business, all the ongoing expenses should be capitalized under Sec 195 based on (C)(1)(A)(iii).”

The judge didn’t buy this argument. The judge basically said that Sec 195 has no application to expenses incurred in an ongoing (i.e. up and running) activity, be it a Sec 212 activity or not. As the judge said:

This Court will not interpret section 195 to override the deductibility of ordinary and necessary expenses petitioner incurred in an ongoing section 212 activity any more than it would do so for an ongoing section 162 activity
But this is all about an “ongoing” Sec 212 activity. And it clearly resolves that issue, IMO.

I've added bold emphasis to show a distinction between how you presented the judge's findings and how he presented them. He didn't say that all expenses related to an ongoing 212 activity can avoid the application of 195(c)(1)(A)(iii); he only said that about ordinary and necessary expenses. If an expense is truly incurred "in anticipation of" the activity becoming a trade or business, then that expense is for the purpose of creating that business. Such an expense would not be an "ordinary and necessary" expense of the 212 activity because it is capital in nature. See Commissioner v. Tellier (383 U.S. 687), where the Supreme Court announced that "[t]he principal function of the term 'ordinary' in § 162(a) is to clarify the distinction, often difficult, between those expenses that are currently deductible and those that are in the nature of capital expenditures". As an expense other than one that is "ordinary and necessary", the Toth opinion would not apply to it and it would be considered a pre-opening expense under 195(c)(1)(A)(iii) even though connected with an ongoing section 212 activity.

The findings in Toth are in accord with the beliefs of the original drafters of section 195. That section was never meant to be a capitalization provision; it was meant to allow amortization of start-up costs of a trade or business. Section 195(c)(1)(A)(iii) and Section 195(a) were only inserted later to force expenses to adhere to capitalization principles that should have been adhered to regardless, but were being flouted via arguments and erroneous holdings such as those found in Hoopengarner. In Toth, the IRS read way too much into the amendments and tried to use them to capitalize expenses that would not have been capital under the fundamental principles underpinning tax law. I now submit that you and Coddington are, in turn, reading too much into the Toth decision. There was no groundbreaking case law development when the IRS was shot down; things were merely reset to the way they were (or, should have been) in 1980.

Jeff-Ohio wrote:In my mind, the issue at play relates to pre-activity commencement expenses with respect to a Sec 212 activity. Old case law said that Sec 195 didn’t apply to such expenses, so people were just expensing them outright. New law says that Sec 195 does apply to those expenses, at least in terms of capitalization.

Where in the case law has anyone said that section 212 pre-activity commencement expenses are capitalized under section 195?
 

#10
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
Where in the case law has anyone said that section 212 pre-activity commencement expenses are capitalized under section 195?

Sec 195 says what it says. It first defines start-up costs and then says those aren’t deductible. If they’re technically capitalized under some other provision, who cares?

*Addendum*
If an expense is truly incurred "in anticipation of" the activity becoming a trade or business, then that expense is for the purpose of creating that business.


You say this, despite what the judge said in Toth, and despite your own words in Post #3:

Once her section 212 activity has begun, the deduction of ordinary and necessary expenses paid or incurred in that activity is not precluded by section 195 regardless of whether that activity is subsequently transformed into a trade or business.

Where your argument is falling flat is in reality. The distinction between a Sec 212 activity that morphs into a Sec 162 activity, in that same “line of business,” is one of the slightest degree. You’re acting like a taxpayer has an ongoing Sec 212 activity…and then we have a distinct pause…and then we now start a Sec 162 activity. You’re focusing on the “pause.” The first issue you have is that you’re implying that during the pause, the Sec 212 activity ceases. Therefore, you would assert, cases like Toth do not apply because we don’t any ongoing activity being undertaken during the pause period. And after the pause we have a brand new business. Therefore, the transformative costs incurred during the pause relate to that new business and are subject to Sec 195. That might be fair enough if the prior Sec 212 activity and the current Sec 162 activity are completely different “lines of businesses.” I think we could all see how that logic might apply. But that is not the reality of things. The reality of things is just like we see in Rose: The Sec 212 activity and the Sec 162 activity involve the same line of business. In Rose, the judge said there was no pause. And if there is no pause, we jump directly from one to the other, making Section 195 inapplicable across the board.

Now, if you say I haven’t captured your argument succinctly, and you’re position is that if the taxpayer anticipates his ongoing Sec 212 activity will later be a trade or business, such that all costs incurred by the ongoing Sec 212 activity are start-up costs for the newly anticipated business, this means Toth was wrongly decided, as Coddington says in Post #2.

All in all, you’re focus is on an extremely narrow issue and is why you can’t find any cases to support your theory, nor can you even give us a good example of what you’re thinking.
 

#11
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Jeff-Ohio wrote:Sec 195 says what it says. It first defines start-up costs and then says those aren’t deductible. If they’re technically capitalized under some other provision, who cares?

Everyone who wants to amortize those costs cares. All costs capitalized under section 195(a) are also amortizable under section 195(b)(1); anything not so capitalized is not amortizable under 195(b)(1).

The definition set forth in 195(c)(1) underpins both of those provisions, so that's where the analysis must be focused.

Jeff-Ohio wrote:
If an expense is truly incurred "in anticipation of" the activity becoming a trade or business, then that expense is for the purpose of creating that business.


You say this, despite what the judge said in Toth, and despite your own words in Post #3:

Once her section 212 activity has begun, the deduction of ordinary and necessary expenses paid or incurred in that activity is not precluded by section 195 regardless of whether that activity is subsequently transformed into a trade or business.

You've completely ignored the distinction I drew in my last post between an "ordinary and necessary" expense and an "expense truly incurred 'in anticipation of' the activity becoming a trade or business". If you think the distinction is bogus, say so. If the distinction is valid, then I haven't contradicted myself or the judge.

Jeff-Ohio wrote:The distinction between a Sec 212 activity that morphs into a Sec 162 activity, in that same “line of business,” is one of the slightest degree. You’re acting like a taxpayer has an ongoing Sec 212 activity…and then we have a distinct pause…and then we now start a Sec 162 activity. You’re focusing on the “pause.” The first issue you have is that you’re implying that during the pause, the Sec 212 activity ceases. Therefore, you would assert, cases like Toth do not apply because we don’t any ongoing activity being undertaken during the pause period. And after the pause we have a brand new business. Therefore, the transformative costs incurred during the pause relate to that new business and are subject to Sec 195. That might be fair enough if the prior Sec 212 activity and the current Sec 162 activity are completely different “lines of businesses.” I think we could all see how that logic might apply. But that is not the reality of things. The reality of things is just like we see in Rose: The Sec 212 activity and the Sec 162 activity involve the same line of business. In Rose, the judge said there was no pause. And if there is no pause, we jump directly from one to the other, making Section 195 inapplicable across the board.

Without question, in cases like Toth and Rose, there weren't any transformative costs to speak of in spite of the conversion of the activity from a 212 activity to one under section 162. That's why section 195 did not apply. So, while I can envision cases where there would be transformative costs within the same line of business, I concede that the "reality of things" is typically a gradual transition that doesn't lend itself to a clear break between the 212 and 162 activities and associated pre-opening expenses.

In Hoopengarner, we have a different situation. The petitioner was engaged in the activity of managing an conserving a leasehold interest that he held to make a profit. But the profit motive he had was tied up in his eventual plan to form a business using that leasehold interest—thus, the expenses incurred in his ongoing holding activity weren't "ordinary and necessary" and should not have been deductible under section 212, notwithstanding the Tax Court's ruling to the contrary.

In hindsight, we might say that there was no ongoing activity at all, thus there was no "activity engaged in for profit and for the production of income", thus the concept of "transformative costs" isn't really on point. But that's not the way the Tax Court saw things back in 1983, and Congress was grappling with the contention that there really was an ongoing activity separate from the section 162 activity that hadn't started yet. They specifically targeted situations like that in Hoopengarner with the statutory reference to "anticipation of [a for-profit] activity becoming an active trade or business". Even as they drafted that language, they may have been thinking to themselves how strange the very notion was. In any case, "for-profit activity" apparently meant something much broader directly in the wake of Hoopengarner.

If we never had Hoopengarner, we may never have had sections 195(a) and 195(c)(1)(A)(iii). But we did get that case and the amendments in response to the case. The Tax Court's reasoning in Hoopengarner was clearly flawed, and so it could be argued that the amendments no longer serve any purpose in light of modern case law and its more sensible interpretation of a "for-profit activity". But the point is that they did serve a purpose in the context of things as they were in 1984, and that purpose was not to allow the amortization of the pre-opening expenses of a section 212 activity.
 

#12
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
All costs capitalized under section 195(a)


Now you’re talking in circles. You said yourself that nothing gets capitalized under Sec 195 because it’s a deduction provision. But, if we play along, you’re incorrect from a technical standpoint: Sec 195(a) doesn’t say you capitalize the costs, it just says the costs are non-deductible.

You've completely ignored the distinction I drew in my last post between an "ordinary and necessary" expense and an "expense truly incurred 'in anticipation of' the activity becoming a trade or business".


It’s a distinction without a difference. Again, you’re focus is narrow. If we have an ordinary and necessary expense of an ongoing Sec 212 activity – an activity like in Toth where it was undisputed that the taxpayer anticipated it to be a business – then that ordinary and necessary Sec 212 expense doubles as one “truly incurred in anticipation of the activity becoming a trade or business.” And what did the judge say about that expense? He said the anticipation doesn’t matter. He said it’s a deductible Sec 212 expense, which doesn’t fall into Sec 195.

If you can maybe give us a firm example of a real life taxpayer, then maybe we can follow your thought process better. Right now, it seems like you’re creating distinctions that courts don’t find to be distinctions.

In hindsight, we might say that there was no ongoing activity at all, thus there was no "activity engaged in for profit and for the production of income", thus the concept of "transformative costs" isn't really on point.


That’s how I see it. All Hoopengarner had was a land lease, an expense. Having an expense doesn’t mean you’re “engaged in” any activity.

and Congress was grappling with the contention that there really was an ongoing activity separate from the section 162 activity that hadn't started yet.


And that’s because of the flawed logic in the Hoopengarner case. That flawed logic led to flawed corrective wording in the statute.

As far as I’m concerned, which comports with the professional literature on the matter, I’d say Sec 195 applies to a Sec 212 activity just as it applies to a Sec 162 activity. We now have parity and equal footing. End result is simple: Pre-commencement costs of the Sec 212 activity get captured by Sec 195. Coddington explained himself very well in the thread you linked in Post #1. We have the statute saying one thing, but we have to take it with a grain of salt, because of the “behind the scenes” stuff the statute doesn’t say.
 

#13
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Jeff-Ohio wrote:You said yourself that nothing gets capitalized under Sec 195 because it’s a deduction provision.

I never said this. I said "[t]hat section was never meant to be a capitalization provision; it was meant to allow amortization of start-up costs of a trade or business" with reference to the original enactment. Then, I explained that Congress changed it in 1984 to also serve as a capitalization provision. I went through this twice, first in post #5, then in post #9.

Jeff-Ohio wrote:But, if we play along, you’re incorrect from a technical standpoint: Sec 195(a) doesn’t say you capitalize the costs, it just says the costs are non-deductible.

If we accept this logic, then we are forced to conclude that section 263(a) is also not a capitalization provision. So unless you can back that up somehow, you should agree that the language of section 195(a) (which, by the way, is called "capitalization of expenditures") does provide for capitalization.

My original point stands: nowhere in case law has anyone said that section 212 pre-activity commencement expenses are capitalized under section 195. You won't be able to slip those in to the section 195(b)(1) amortization provision unless you can first show that they are defined by section 195(c)(1), which brings us back to the meaning of "active trade or business".

Jeff-Ohio wrote:If you can maybe give us a firm example of a real life taxpayer, then maybe we can follow your thought process better. Right now, it seems like you’re creating distinctions that courts don’t find to be distinctions.

195(c)(1)(A)(iii), as clarified by Toth, targets expenses incurred for profit or for management of property held for profit, but which are not ordinary and necessary until an active trade or business begins. Hoopengarner and Hardy contain examples of such expenses.

195(c)(1)(A)(iii) does not target expenses which are already ordinary and necessary before an active trade or business begins. Toth and Rose contain examples of such expenses.

The distinction I'm drawing is between these two types of expenses.

Your argument is essentially that under modern case law, this distinction will never come into play because any example of the first type of expense I can think of would have to be incurred when there is no ongoing activity; i.e., in a situation where expenses generally aren't currently deductible in any case due to the pre-opening expense doctrine. Your argument is that the two types of expenses can't exist side by side, so no standard is necessary to distinguish them.

The IRS would disagree with you. Based on the arguments they made in Rose, they are still attempting to apply the standard in question. They may never succeed, and that's fine—I'm not arguing that the standard is still useful, but rather 1) that it exists, and 2) that creating it was the purpose of the enactment of section 195(c)(1)(A)(iii). I don't think the objections you've raised dampen either of these two points.

As far as I’m concerned, which comports with the professional literature on the matter, I’d say Sec 195 applies to a Sec 212 activity just as it applies to a Sec 162 activity. We now have parity and equal footing. End result is simple: Pre-commencement costs of the Sec 212 activity get captured by Sec 195. Coddington explained himself very well in the thread you linked in Post #1. We have the statute saying one thing, but we have to take it with a grain of salt, because of the “behind the scenes” stuff the statute doesn’t say.

Your reasons for amortizing start-up costs for a 212 activity under section 195 appear to be 1) it is an equitable result, 2) Coddington has made arguments to support the position, and 3) professional literature agrees with the position. Your first and second points are already acknowledged in my post #1. Your third point hasn't been touched on, so if you have professional literature to cite in support of the position, then please cite it by all means.
 

#14
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
So unless you can back that up somehow, you should agree that the language of section 195(a) (which, by the way, is called "capitalization of expenditures") does provide for capitalization.

I can back it up by the plain words of the statute. And Section 195, by the way, falls under Chapter 1, Subchapter B, Part VI – Itemized Deductions for Individuals and Corporations.

then we are forced to conclude that section 263(a) is also not a capitalization provision.

That’s correct. It’s the interplay between a Code Section that says it’s not deductible (like Sec 263), and another one that says it is (like Sec 168) , that makes tax basis Balance Sheet capitalization appropriate, like with a building. Of course, general accounting principles are operating behind the scenes. The Code doesn’t talk much about those, as I’ve mentioned before. Further, a taxpayer could just expense his Sec 195 costs to his P&L, as a non-deductible expense, if he felt like it.

Under your logic, we’d capitalize penalties and fines to the Balance Sheet, since that subsection says they’re not deductible, just like Sec 263 says a building isn’t deductible.

nowhere in case law has anyone said that section 212 pre-activity commencement expenses are capitalized under section 195.


And nowhere in the case law does it say they aren’t.

You won't be able to slip those in to the section 195(b)(1) amortization provision unless you can first show that they are defined by section 195(c)(1)


In the other thread, Coddington already explained such a reading of the statute is incorrect.

The distinction I'm drawing is between these two types of expenses.

Unless you provide a concrete, real-life example (instead of just making references to other stuff), I’m not buying it.

The third point hasn't been touched on, so if you have professional literature to cite in support of the position, then please link it by all means.

Here’s a few. And certainly you know who James Hamill is.

https://www.abqjournal.com/biz/18224354biz10-18-10.htm

https://www.thetaxadviser.com/issues/20 ... costs.html
 

#15
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Jeff-Ohio wrote:
then we are forced to conclude that section 263(a) is also not a capitalization provision.

That’s correct. It’s the interplay between a Code Section that says it’s not deductible (like Sec 263), and another one that says it is (like Sec 168) , that makes tax basis Balance Sheet capitalization appropriate, like with a building. Of course, general accounting principles are operating behind the scenes. The Code doesn’t talk much about those, as I’ve mentioned before. Further, a taxpayer could just expense his Sec 195 costs to his P&L, as a non-deductible expense, if he felt like it.

Under your logic, we’d capitalize penalties and fines to the Balance Sheet, since that subsection says they’re not deductible, just like Sec 263 says a building isn’t deductible.

You keep calling my focus narrow, but I think this takes the cake.

I will admit this is very interesting from a theoretical standpoint. But I don't want to sidetrack the conversation, so I'm just going to pluck out one thing you said and replace a few words to prove that section 195 does have a capitalization effect, using your logic:

    It’s the interplay between a Code Section that says it’s not deductible (like Sec 263195(a)), and another one that says it is (like Sec 168195(b)(1)) , that makes tax basis Balance Sheet capitalization appropriate
Analyzed in this fashion, the argument that "if [section 212 costs] are capitalized under section 195, they can therefore be amortized under that section" no longer makes sense. In order to be considered capitalized under section 195, something would first require deductibility under that section.

So that points to section 195(b)(1) as the test that your costs need to meet. And, what do you know, that paragraph uses the phrase "active trade or business"—so here we are again, right back where I keep saying we should be.

Jeff-Ohio wrote:
nowhere in case law has anyone said that section 212 pre-activity commencement expenses are capitalized under section 195.


And nowhere in the case law does it say they aren’t.

Yes, I agree with this. The case law is fully silent on whether or not section 212 pre-activity commencement expenses are capitalized and deducted under sections 195(a) and 195(b)(1). This means we need to turn to statute and legislative history regarding the meaning of "active trade or business". I provided a thorough analysis of these in posts #4 and #5, which no one has so far been able to dispute or find fault with in any way. The law itself is clear that 212 activities are not included in the term.

Jeff-Ohio wrote:
You won't be able to slip those in to the section 195(b)(1) amortization provision unless you can first show that they are defined by section 195(c)(1)


In the other thread, Coddington already explained such a reading of the statute is incorrect.

I have no idea where you're getting this. On these points we're arguing, Coddington's posts have been in line with my position. See the following:

Coddington wrote:Is the "active trade or business" requirement in (b) different from the one in (c)(1)(A)(iii)? Saying "yes" will violate the equivalency standard and doesn't seem like it would get much traction in the Tax Court. Saying "no" violates basic norms of construction, but might work in a non-Tax Court setting.

What it really comes down to is that Congress, if they intended to address something beyond the facts of Hoopengarner, botched the statutory language. The Tax Court bailed them out by setting up section 195 with an esoteric meaning of "active trade or business".

Coddington would agree that the heart of this argument lies in the definition of "active trade or business". He doesn't agree with me on what it means, but he would agree that once the meaning is settled, everything else about section 195 flows logically from there.

Jeff-Ohio wrote:Unless you provide a concrete, real-life example (instead of just making references to other stuff), I’m not buying it.

I gave you Hoopengarner and Hardy, but now you insist on a "concrete, real-life example". Tell me, what about the presumptive section 212 expenses in those cases is not good enough for you? Are they not concrete, not real life, or not examples?

Jeff-Ohio wrote:And certainly you know who James Hamill is.

Weekly tax column and CPE courses. Is there anything else I should know?

But back to the point, I see that James Hamill would side with you and Coddington on this issue. Sure, that would be enough for some of the members of this forum to go on. But not all of them.

For those of us who aren't comfortable just taking everyone's word for it, I want to see what the argument from reason, not from authority, for your position is. So far I haven't seen anything beyond what I presented myself way back in post #1.
 

#16
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
Is there anything else I should know?

You mean aside from the fact that he knows more tax law than anyone in the world, including a mastery of Subchapter K?

but I think this takes the cake. I will admit this is very interesting from a theoretical standpoint.

Yes, fascinating, especially when we throw 705(a)(2)(B) into the mix:

(B) expenditures of the partnership not deductible in computing its taxable income and not properly chargeable to capital account

You see, if something isn’t deductible in computing taxable income, it might or might not be “properly chargeable to [a] capital account.”

so I'm just going to pluck out one thing you said and replace a few words to prove that section 195 does have a capitalization effect


That’s fair enough, but my comment was more directed at your Sec 263 comment. But do note, 195(b)(1) is elective.

I provided a complete analysis of these in posts #4 and #5, which no one has so far been able to dispute or find fault with in any way, showing that the law is clear that such expenses are not deductible.

“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.”

You say no deduction for the June rent. I say it’s a start-up cost. All we need is some activity to begin.

Coddington has made his case and I agree with him. Among other things, Coddington pointed out that the Senate Report treats a “net lease” as an active trade or business for purposes of Sec 195 (when we all know that it’s not a business under Sec 162 and hence, isn’t a business for QBI purposes). The word “passive” also shows up in the Senate Report. The law is clear enough for me to take the deduction. That position comports with the concepts of parity and equal footing that have been tossed around with respect to this issue. It comports with the matching principle, as Hamill notes. And there’s no case law that says otherwise. Hoopengarner involved a guy that didn’t even have an ongoing Sec 212 activity. All Congress wanted to do was prevent the immediate expensing of his land rent payments. And they did so with a sloppily written statute, which you are hanging onto with your dear life. And who’s to say that Hoopengarner’s building would have even been a Sec 162 activity anyway?

But not all of them.

Why would people side with your argument, which is entirely unsupportable from a case law perspective?

So far I haven't seen anything beyond what I presented myself way back in post #1.

That’s because we had an answer before you even posted your Post #1, an answer which you simply don’t like.
 

#17
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Jeff-Ohio wrote:he knows more tax law than anyone in the world, including a mastery of Subchapter K

That's a bold claim. Where is it supported?

“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.”

You say no deduction for the June rent. I say it’s a start-up cost. All we need is some activity to begin.

I agree that the cost is capitalized, and I agree that the cost can possibly be deducted under section 195. Where we disagree is on the threshold for the deduction. If there are no plans to turn the activity into a business, then the rent is not paid "in anticipation of such activity becoming an active trade or business", and we would have to wait to deduct it until the activity is disposed of.

You say a deduction when the activity begins would better comport with the matching principle, but the cost was not ordinary and necessary for the production of the income you want to match it against. The cost is better associated with the development of the income-producing activity itself. An activity is an intangible asset, and the Code sets forth a clear standard that unless such an asset has a determinable life or a specific provision applies to the contrary, there is no amortization allowed for the capitalized costs of the asset. That treatment is a better reflection of the matching principle than the completely arbitrary $5,000 + 180 month amortization provided by section 195.

You say a deduction when the activity begins would better comport with the concepts of parity and equal footing, but these concepts are not universal. The pari materia standard announced by the Hardy court applies to deductions under sections 162 and 212, and not to those under any other section. There are plenty of Code sections where a trade or business and a non-trade or business investment activity are on unequal footing, and several sections where only a "trade or business" qualifies for a benefit of any kind - for example, sections 179, 190, 195, and 199A. Should we interpret the pari materia standard to confer benefits to all non-trade or business investment activities in Code sections like these where they aren't specifically mentioned? No. The Hardy court wasn't saying anything new about investment activities, they were merely restating the intent of Congress as to how such activities could qualify for deductions under section 212, an intent that dates back to 1942 when such deductions were first allowed.

the Senate Report treats a “net lease” as an active trade or business for purposes of Sec 195 (when we all know that it’s not a business under Sec 162 and hence, isn’t a business for QBI purposes). The word “passive” also shows up in the Senate Report.

I addressed this argument in post #5. In brief, it isn't true that all activities involving net leases are not businesses under section 162, and when you try and read otherwise in to the committee report, the result doesn't comport with Congressional motives at the time, both stated and unstated. Also note that the report doesn't treat "a net lease" as "an active trade or business"; rather, it provides that treatment for "a business where property is regularly based on a net lease basis". If you try and use this to mean "active trade or business", you've got a circular definition because of the word "business".

Hoopengarner involved a guy that didn’t even have an ongoing Sec 212 activity. All Congress wanted to do was prevent the immediate expensing of his land rent payments. And they did so with a sloppily written statute, which you are hanging onto with your dear life.

The statute only becomes "sloppily written" when we assume that it operates to confer section 195 benefits on section 212 activities. But Congress didn't want to do that. All they wanted to do, as you yourself point out, "was prevent the immediate expensing of his land rent payments". Other than that, they intended "that the definition of start-up expenditures be generally the same as under present law" (S. Rept. 98-169), a law which was drafted by a Congress that declared "an activity with respect to which expenses are deductible only as itemized deductions for individuals (Code sec. 212) is not considered to be a trade or business" (S. Rept. 96-1036).

If I'm hanging on to this statute for dear life, then I ask: against the pull of what?

And who’s to say that Hoopengarner’s building would have even been a Sec 162 activity anyway?

The Hoopengarner court itself made this clear. See the second paragraph of Judge Cohen's dissenting opinion, 80 T.C. at 545.

Why would people side with your argument, which is entirely unsupportable from a case law perspective?

Because your argument is equally unsupportable from a case law perspective, but mine is stronger from a statutory perspective. See for example JAD's and WEISSEA's objections throughout this thread, as well as your own commentary leaning towards stronger statutory support for my position in post #13 of that thread. In that post #13, you implore us to look "behind the scenes" to understand why the statutory language should be twisted to mean what you want it to mean. When JAD looked behind the scenes, she didn't see anything there. I don't see anything either.

we had an answer before you even posted your Post #1, an answer which you simply don’t like.

Yes, I don't like the answer. But the reason is I don't see any support for it, so let's focus on that.
 

#18
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
If there are no plans to turn the activity into a business, then the rent is not paid "in anticipation of such activity becoming an active trade or business"


Sure it was, because investing in stocks is indeed an “active trade or business” as defined in the Senate Report from the DRA of 1984. That is the relevant guidance, not anything that came earlier. Furthermore, the older Senate Report you reference can easily be understood to mean that Section 195 doesn’t apply to a Sec 212 activity. The result is that all expenses of a Sec 212 activity, no matter when incurred, are immediately and fully deductible. The “fix” for that “loophole” came in 1984.

The cost is better associated with the development of the income-producing activity itself. An activity is an intangible asset, and the Code sets forth a clear standard that unless such an asset has a determinable life or a specific provision applies to the contrary, there is no amortization allowed for the capitalized costs of the asset. That treatment is a better reflection of the matching principle than the completely arbitrary $5,000 + 180 month amortization parameters of section 195.


This is entirely off base. It’s no surprise that the lives under Sec 197 and 195 are both 15-years. That’s the period over which Congress believes most intangibles should be recovered. The expense of creating an intangible that is deemed to last for such a period should be matched with the income generated over that period. While the $5k might be arbitrary, it’s coupled with a phase-out. That provision is obviously intended to give some relief to an extended amortization period, plain and simple.

You say a deduction when the activity begins would better comport with the concepts of parity and equal footing, but these concepts are not universal. The pari materia standard announced by the Hardy court applies to deductions under sections 162 and 212, and not to those under any other section.


The matter is simple: There was a disconnect between a Sec 162 activity and a Sec 212 activity. Expenses under the latter didn’t have to be capitalized because Sec 195 didn’t apply to Sec 212. The law was changed for that reason and that reason alone. If Congress botch the writing of the provision, so what. Everything that underpins the change points to one thing: The change was intended to throw Sec 212 activities under the veil of Sec 195. It really is that simple.

Also note that the report doesn't treat "a net lease" as "an active trade or business"; rather, it provides that treatment for "a business where property is regularly based on a net lease basis". If you try and use this to mean "active trade or business", you've got a circular definition because of the word "business".


You’ve only got a circular definition under your interpretation. Everyone else’s interpretation is that this “business” and “active business” that Congress speaks of covers what most everyone understands to be a Sec 212 activity.
But the reason is I don't see any support for it, so let's focus on that.


If you choose to be blind, that’s on you. Why should we focus on the reason you don’t see any support for it? We should focus on how this would pan out if it went to court. At that point, your blindness should be healed.
 

#19
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Jeff-Ohio wrote:Why should we focus on the reason you don’t see any support for it? We should focus on how this would pan out if it went to court.

No, I didn't say "focus on the reason I don't see any support for it". I said to focus on the support for it. That's also what they would do in court, so we agree.

Sure it was, because investing in stocks is indeed an “active trade or business” as defined in the Senate Report from the DRA of 1984. That is the relevant guidance, not anything that came earlier.

See my post #5 for why the earlier guidance is more relevant and couldn't have been defeated by a mere committee report, even if Congress had wanted to do so, and also for why Congress didn't want to do that in any case.

Furthermore, the older Senate Report you reference can easily be understood to mean that Section 195 doesn’t apply to a Sec 212 activity. The result is that all expenses of a Sec 212 activity, no matter when incurred, are immediately and fully deductible. The “fix” for that “loophole” came in 1984.

You might easily understand it that way, but your view of Congressional intent would be defeated in a court setting. See for example Hardy, where the Tax Court stated that "it is clear from the legislative history that Congress then believed pre-opening expenses not to be currently deductible under either section 162 or section 212" (93 T.C. 691-692). In support they cite the same Committee Report we are discussing along with two court cases.

It’s no surprise that the lives under Sec 197 and 195 are both 15-years. That’s the period over which Congress believes most intangibles should be recovered. The expense of creating an intangible that is deemed to last for such a period should be matched with the income generated over that period.

You're suggesting that based on the recent 15 year trend for amortizables, we should infer start-up costs for a 212 activity to have a 15 year life as well by corollary, and the matching principle in the income tax context should be applied to that. But the concept of "life" here is inapplicable as a fundamental principle; it's well settled that an activity itself does not have a determinable useful life. Thus, section 197 (as it applies to goodwill) and section 195 constitute exceptions to that general principle. 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?

There was a disconnect between a Sec 162 activity and a Sec 212 activity. Expenses under the latter didn’t have to be capitalized because Sec 195 didn’t apply to Sec 212. The law was changed for that reason and that reason alone.

Pre-opening expenses, no matter what the activity, were already capital before section 195 was enacted according to majority view of the courts and the view of Congress. When section 195 allowed their deduction in the case of an active trade or business, that did not influence the inherent capital nature of the expenses and did not result in the Hoopengarner decision. Rather, that decision was the product of a minority view that the Hoopengarner court held, which disregarded the pari materia between sections 162 and 212. That minority view on the absence of pari materia was the disconnect that the law's amendments sought to correct.

You’ve only got a circular definition under your interpretation.

Your argument is that net leases aren't businesses, therefore the business of doing net leases is also not a business, therefore "business" doesn't mean "business". Is that circular? Maybe not, but it's definitely something strange. Possibly a non sequitor at step 2?

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".

If Congress botch the writing of the provision, so what. Everything that underpins the change points to one thing: The change was intended to throw Sec 212 activities under the veil of Sec 195. It really is that simple.

This brings us back to the Rose case, cited by Coddington in post #6. My guess is that Coddington believes this case is fatal to my argument because we have a judge saying directly that "[s]ection 195 applies to both section 162 activities and section 212 activities". A similar claim also appears in the second article you linked in post #14.

The reason I don't mind these claims is that they don't actually mean what you think they mean.

We don't have a statement from either source clarifying in what way section 195 applies to section 212 activities, so we must examine the case law that the claims are based on to reach this understanding. The judge in Rose cited Hardy and Toth. Here are the segments in each of those cases where the Tax Court opined on the application of section 195 to section 212 activities:

    In 1984, Congress amended section 195. One of the express purposes of the amendment was to disallow deductions of the type permitted under the Hoopengarner line of cases. Hoopengarner is expressly cited in the legislative history as an example of "pre-opening costs" that are to be brought within the definition of "start-up expenditures" and to be treated as deferred capital expenditures with an election to amortize them over not less than 60 months. (Hardy, 93 T.C. 692)
    The Senate print accompanying the Deficit Reduction Act of 1984 stated that the intent of Congress in amending the statute was to "decrease the controversy and litigation arising under present law with respect to the proper tax treatment of start-up expenditures" by requiring expenses similar to those allowed as deductions in Hoopengarner to be capitalized. S. Prt. 98-169 (Vol. I), supra at 283. The purpose of the 1984 amendment to section 195 was to bring sections 212 and 162 into parity when determining whether an expenditure has been incurred in a startup activity. (Toth, 128 T.C. 5-6)
These segments can be distilled into two points:

  1. Expenses like those in Hoopengarner are capitalized and fit within the definition of "start-up expenditures", and
  2. Section 162 and section 212 operate identically with regard to assignment of expenditures to startup activities.
The first point shows us how section 195 applies to 212 activities. Hoopengarner was managing and conserving property held for the production of income, so he had a section 212 activity based on statutory language. Modern case law would not allow him a deduction under that section due to the pre-opening expense doctrine, but because he was planning on starting an "active trade or business", his expenses would be scooped up by section 195(c)(1)(A)(iii) and allowed as a deduction under section 195(b)(1). Section 195 would apply to his activity.

The second point describes the parity created between sections 212 and 162. In 1983, Hoopengarner was allowed to deduct expenses under section 212 where he would not have been able to deduct them under section 162. The sections were not in parity. Now, he would not be allowed a deduction because each section respects the pre-opening expense doctrine. The sections are in parity.

Based only on this two points, we have a framework described by the claim "section 195 applies to section 212 activities". Under this framework, section 162 is in pari materia with section 212, the aims of Congress as stated are fulfilled, and the statutory language as plainly written makes sense. Neither point calls for us to alter our understanding of the term "active trade or business".

But you and Coddington want to disrupt this harmony by working backwards from your understanding of what it would mean for sections 212 and 162 to be in parity and using that to justify a new meaning of "active trade or business" that was never provided for, impute a motive onto Congress that was never there, and envision new theories operating "behind the scenes" that no one else can see. Your interpretation conflicts with the plain wording of the statute, but as you put it, "so what". The actual law as written doesn't justify your conclusion, so it's not important, right?
Last edited by Chay on 27-Jun-2019 9:06am, edited 1 time in total.
 

#20
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
No, I didn't say "focus on the reason I don't see any support for it".


Sure you did, you said:

But the reason is I don't see any support for it, so let's focus on that.


Maybe you didn’t mean what you said, but that is, in fact, what you said…

See my post #5 for why the earlier guidance is more relevant


I have. It’s unpersuasive. 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.”

"it is clear from the legislative history that Congress then believed pre-opening expenses not to be currently deductible under either section 162 or section 212"


I concur. They get amortized under Sec 195, in both cases.

But the concept of "life" here is inapplicable as a fundamental principle;
it's well settled that an activity itself does not have a determinable useful li
fe.

No kidding. But 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.
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.

That minority view on the absence of pari materia was the disconnect that the law's amendments sought to correct.


What you just said in several flowery sentences is what I already said, but more concisely.

Your argument is that net leases aren't businesses


My argument is that the Senate Report says what it says.

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.

We don't have a statement from either source clarifying in what way section 195 applies to section 212 activities


The flush language of Sec 195 says:

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.

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 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.

My guess is that you screwed this up on a bunch of tax returns and now realize your mistake.

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. You can do that for your clients if you wish, I don’t care.
 

#21
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
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.
 

#22
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
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
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
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
dave829  
Posts:
680
Joined:
9-Jan-2018 9:28pm
Location:
California
Jeff-Ohio and Chay, haven't we had enough of this? Can't you two just "agree to disagree"?
 

#25
Posts:
221
Joined:
12-Jun-2014 6:13pm
Location:
North Carolina
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
 

#26
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
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
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
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.
 

#28
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
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
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
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?
 

#30
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
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
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
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.
 

#32
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
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
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
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?
 

#34
Posts:
221
Joined:
12-Jun-2014 6:13pm
Location:
North Carolina
: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
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
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
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
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
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
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
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
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
Posts:
221
Joined:
12-Jun-2014 6:13pm
Location:
North Carolina
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
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
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.
 

#41
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
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.

First off, there really are no leaps. It is a conclusion based on perspective, pursuant to what was happening at the time and what had happened. This has thoroughly been explained. You simply choose to reject the underlying currents.

Second of all, it doesn’t conflict with the plain language of the statute. It simply adds in another category of taxpayers. This has also been thoroughly explained.

Third of all, while it might be outside of the purpose of the anti-Hoopengarner amendment, it was well within the purpose of capturing other stuff that the anti-Hoopengarner amendment didn’t catch. Namely, Sec 212 activities that always intended to be Sec 212 activities.

There's no plain-language case for the last three sentences of the Committee Report doing anything other than discussing the term "active".

You say discuss, I say expand. This has also been thoroughly been explained.

All you've got is an argument about what the 1984 Report should say.

Not really. What I have is what the 1984 Report actually does say, but with perspective and context (as opposing to just reading the words, as you have done).

You can reference whoever you want and say whatever you want about your source.

Thank you for your approval.

It would be an idea different from what yours is.

Hopefully not, with respect to Sec 195, as per the 1984 Senate Report, which described a net lease as a “business” for that purpose.

This asks more of the practitioner and of the law.

Then why do the “practitioner” sources I cited agreed with me? The simple thing is to say that Sec 195 applies across the board.

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

And one little piece about context is why those 2 sentences show up in the first place…if the 1984 statutory amendment adequately accomplished what Congress set out to do, the Senate Report would have stopped at, “The addition of this provision was intended to over-ride Hoopengarner.”
 

#42
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Jeff-Ohio wrote:First off, there really are no leaps. It is a conclusion based on perspective

Ok, lets go with your terminology. Your interpretation requires more "conclusions based on perspective" than mine does.

Jeff-Ohio wrote:You simply choose to reject the underlying currents.

The same blatantly false claim for the fourth time. I'm not turning a blind eye to anything—I know this was on Congress' agenda. But to say that Congress generally wanted something to happen at the time doesn't necessarily mean that they accomplished it in any given enactment that loosely relates to those aims. I gave another plausible explanation for their aims in post #5. While your interpretation deserves consideration, so does mine. In deciding between the two, we must turn back to the primary sources themselves to see which fits better with them.

Jeff-Ohio wrote:it doesn’t conflict with the plain language of the statute. It simply adds in another category of taxpayers.

Section 195 itself as well as both Senate Reports and the 2011 Blue Book say that amortization of start-up costs is for costs incurred in a trade or business. The very definition of a section 212 activity derives by exclusion from the category "trade or business". When you say you want to go ahead and consider a trade or business to include this thing that specifically isn't a trade or business, you're in conflict with the plain meaning of the words you're using.

Imagine Congress writes a statute specifically targeting females to lend them a hand, then makes an amendment clarifying that males who undergo a sex change are considered females for purposes of their statute. At the same time, they express a general desire for a more inclusive definition of the term "female". Now you come in and argue that in this case, the term "female" must include the meaning "male" because if it did, that would indirectly assist in the general purpose of discouraging male-centric views. That argument just doesn't work without some additional, fairly convincing evidence.

If you argue in the alternative that although a 212 activity isn't an "active trade or business", it's still included in the term "start-up expenditures", you're expanding by corollary again. You're saying the law itself has additional language that isn't even there.

Third of all, while it might be outside of the purpose of the anti-Hoopengarner amendment, it was well within the purpose of capturing other stuff that the anti-Hoopengarner amendment didn’t catch. Namely, Sec 212 activities that always intended to be Sec 212 activities.

Yes, it's within that purpose. My point is, that purpose was not stated in the Senate Report itself.

You say discuss, I say expand. This has also been thoroughly been explained.

My point is that you need to bring in some outside context to show that there's any expansion going on at all.

(as opposing to just reading the words, as you have done).

Here's that blatantly false claim again for the fifth time.

the 1984 Senate Report, which described a net lease as a “business” for that purpose.

It did not. It described "a business where property is regularly based on a net lease basis" as "an active trade or business". The meaning of this sentence isn't that "net leases are businesses". It's that "a business, even when it focuses on net leases, is active".

Then why do the “practitioner” sources I cited agreed with me?

I disputed that the Tax Adviser article actually agrees with you. Hamill agrees with you because he's bought in to the less obvious, more complex version of things that asks more of him. I don't know why he did this. If we can find out why, that would be a good point to add to the discussion. If not, you're left with saying he bought in so it must be true, and that's an argument from authority.

if the 1984 statutory amendment adequately accomplished what Congress set out to do, the Senate Report would have stopped at, “The addition of this provision was intended to over-ride Hoopengarner.”

I agree with this. We know they were up to something more; the question is what it was specifically. You and I both have plausible, conflicting interpretations about this that should be evaluated by turning back to the primary sources.
 

#43
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
Your interpretation requires more "conclusions based on perspective" than mine does.

That’s right. Based on an understanding of what was happening at the time and what had happened, with the Hoopengarner case…and what might happen with a guy who says, “I have a 212 activty that will always be a 212 activity.”

The same blatantly false claim for the fourth time


It’s not false and it’s not blatantly false. You said yourself:

You and I both have plausible, conflicting interpretations about this that should be resolved by turning back to the primary sources.


You want to turn back to the primary sources, which means you turn away from perspective.

Section 195 itself as well as both Senate Reports and the 2011 Blue Book say that amortization of start-up costs is for costs incurred in a trade or business.


I would submit that the Blue Book doesn’t precisely capture (c)(1)(B). And I would further submit that the second Senate Report effectively re-defined “active trade or business” to something that “isn’t that” with respect to a layman’s definition.

Imagine Congress writes a statute specifically targeting females to lend them a hand, then makes an amendment clarifying that males who undergo a sex change are considered females for purposes of their statute.


Or imagine that Congress defines females in an initial committee report, but a later committee report says that the term “females” will also include males.

If you argue in the alternative that although a 212 activity isn't an "active trade or business", it's still included in the term "start-up expenditures", you're expanding by corollary again


I’m not arguing in the alternative.

It did not.

It did. And one of the little pieces you’re failing to grasp is that if the 1984 Senate Report writers thought that the anti-Hoopengarner statute addition would adequately capture everything they wanted captured, there would have been no commentary about “passive businesses” and “net leases.” Those would have already been captured.

I disputed that the Tax Adviser article actually agrees with you.


Then let’s just replace it with what the judge said in Rose, which was:

Section 195 applies to both section 162 activities and section 212 activities.


It can’t get any simpler than that, despite your belief that your theory is more simpler.

You and I both have plausible, conflicting interpretations about this that should be resolved by turning back to the primary sources.


That’s where you’re off base. The 1984 Senate Report was a clear-cut attempt to legislate via committee report. The real question is if it will have that effect or not.

Don’t get me wrong…I don’t necessarily feel that Congress intended to throw non-rental, Sec 212 activities into Sec 195. Quite frankly, the 1984 Senate Report writers lost sight of the forest for the trees. But their high degree of concern for those tax shelters that were 212 activities and would always be, caused an expansion of the statute such that we can now defensibly, comfortably and broadly say - just like Coddington did, just like Hamill did, just like the Tax Adviser author did and just like the Rose judge did: Section 195 applies to both section 162 activities and section 212 activities.

That is the present state of affairs with this issue. If and when you ever find a case to the contrary, just let us know. Until then, you’re arguments remain purely academic and entirely useless to the practitioner.
 

#44
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Jeff-Ohio wrote:
The same blatantly false claim for the fourth time


It’s not false and it’s not blatantly false. You said yourself:

You and I both have plausible, conflicting interpretations about this that should be resolved by turning back to the primary sources.


You want to turn back to the primary sources, which means you turn away from perspective.

It's blatantly false. You say I lack perspective, but I was narrating perspective before you ever made your first post in this thread.

Your perspective focuses on a different trend than mine. Both are valid observations. How are we to evaluate them as they apply to the section 195 amendment? I say we need to look at the primary sources. You (apparently) see that as a sign of weakness. You'd rather stay firmly grounded in your perspective and ignore what the sources in front of us say. It reminds me of religious faith.

Is faith abhorrent? Certainly not. Does it support rational arguments? No.

I would submit that the Blue Book doesn’t precisely capture (c)(1)(B).

Every aspect of that part of the law is reflected in some part of the sentence I quoted. The only way to deny this would be to assert, as you do, that "active trade or business" is a completely novel and counter-intuitive thing that carries hidden meanings. In that case, the only ways to precisely transfer the meaning would be to either 1) transplant the words "active trade or business" in place of the phrases "trade or business" and "business", or 2) actually explain what the hell is (allegedly) going on.

But the drafters of the Blue Book didn't do either of those things. Instead, they captured the meaning of "active" using the word "began". They clearly don't have the deep perspective and behind-the-scenes theories that you do, because to them, "active" simply means that something is currently operating, and "trade or business" simply means "trade or business".

And I would further submit that the second Senate Report effectively re-defined “active trade or business” to something that “isn’t that” with respect to a layman’s definition.

This appears to be your central claim, the thing we've been arguing about this whole time. That means you can't use it to support other claims within the same argument.

Or imagine that Congress defines females in an initial committee report, but a later committee report says that the term “females” will also include males.

I've done as you asked and I don't think the analogy fits our facts. Congress didn't say that one term means the other. You are inferring that this was their intention.

It did not.

It did.

See the above. Inferring the intent is different from reading the actual words. No part of the 1984 Senate Report actually describes a net lease as a business. Quite the opposite—it offers an example of a business that was engaged in frequent net leasing. Your argument is that "business" must therefore not mean "business", but something broader that includes things that aren't businesses. You have no basis for this argument outside of your "perspective".

And one of the little pieces you’re failing to grasp is that if the 1984 Senate Report writers thought that the anti-Hoopengarner statute addition would adequately capture everything they wanted captured, there would have been no commentary about “passive businesses” and “net leases.” Those would have already been captured.

You already said this in #41, and I already responded in #42 as follows:

    I agree with this. We know they were up to something more; the question is what it was specifically. You and I both have plausible, conflicting interpretations about this that should be evaluated by turning back to the primary sources.
I disputed that the Tax Adviser article actually agrees with you.


Then let’s just replace it with what the judge said in Rose, which was:

Section 195 applies to both section 162 activities and section 212 activities.


It can’t get any simpler than that, despite your belief that your theory is more simpler.

I disputed that this quote agrees with you in the same breath that I disputed the Tax Adviser quote's meaning. This was back in post #19. In that post, I actually focused more on the Rose quote and what it would mean if applied specifically to the two cases that it cites in support: Hardy and Hoopengarner. Neither supporting case held that section 212 pre-activity commencement expenses are capitalized and deducted under sections 195(a) and 195(b)(1). As we've discussed, the case law is fully silent on that point.

The conclusion to your post sounds nice, but it draws together unfounded claims, restates mere arguments from authority, and then accuses my arguments of the very fault that so plagues yours: a lack of support from the evidence.
 

#45
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
The only way to deny this would be to assert, as you do, that "active trade or business" is a completely novel and counter-intuitive thing that carries hidden meanings.

Yeah, completely hidden, like when the ’84 Report says active includes passive. Or like when the “significant furnishing of services” in the ’80 Report is muddled down to “regularly” in the ’84 Report (not even regularly and continuously). Or like when the insertion of a net lease takes place within the ’84 Report (whereas you had things like apartment complexes and shopping centers referenced in the ’80 Report). Totally hidden.

I disputed that this quote agrees with you in the same breath as I disputed the Tax Adviser article's meaning.


I know, I know. You dispute everything, including conclusions drawn by a Tax Court judge in a very recent case. Again, once you have “evidence” to support your theory, such as a case, just forward it along. Until then, it seems that the legal and tax practitioner communities will retain the highly simple and non-controversial status quo.
 

#46
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
You continue to misrepresent the 1984 committee report. It doesn't say "active includes passive" or anything like that. It says an active trade or business may include "a trade or business that is in many respects passive". References to "regularly" but not "continuously" and to net leases illustrate the notion of a "passive trade or business", but they don't transform the term "trade or business" into anything else. All you have to support that transformation is your "perspective". So yes, if the term has transformed, its new meanings are now totally hidden, as you say.

Your evidence is two sentences at the end of the 1984 Committee Report, the quotes from the Tax Adviser and Rose, the support of James Hamill and Brian Coddington, and "perspective".

Of these sources, the only ones that actually say that the term "active trade or business" includes a section 212 activity are Coddington and Hamill. Because these two sources can't dictate law, you have to fall back on the reasoning and evidence that they provide, not their words alone. Hamill gives you nothing. Coddington gives you most of what we've already been discussing. The Tax Adviser and Rose quotes are extremely brief summaries of section 195(c) and the rulings in Hardy and Toth. To understand what they mean, we have to look at the law and at those two cases. We find that the issue of the definition of an "active trade or business" was not addressed at all, even in passing, in any of those three sources. They also don't address 212 activities that were always intended to be 212 activities.

The only legally authoritative sources we have that address the issue of the definition of an "active trade or business" within section 195 are the 1980 Committee Report, the 1984 Committee Report, and the 2011 Blue Book. The 1980 report explicitly says that 212 activities are excluded. The Blue Book says "start-up expenditures" refer to trade or business expenses that would be deductible if the business had begun. The 1984 Committee Report says that it intends "that the definition of start-up expenditures be generally the same as under present law" and then says that an "active trade or business" can be "in many respects passive".

Your argument is that we should toss out the 1980 Committee Report, ignore the Blue Book, and interpret the phrase "in many respects passive" to mean "a section 212 activity". Why? Because of your "perspective".

When I question your perspective, you mount an unyielding defense.

You claim your perspective is in the majority. You haven't shown this to be true, and it wouldn't mean anything even if it were.

You claim that at least you have perspective, that's something I refuse to adopt. But this is your blatantly false claim which is contradicted by the perspective I provided in post #5. Even if I didn't have that perspective, so what? Mere perspective doesn't transform language. Legislating by Committee Report is possible, but it requires that words to the desired effect actually be written.

So in the end, you haven't really given us anything besides an unfounded opinion. But you rest your case by claiming that your unfounded opinion is in the majority, and thus no one will believe me until I provide some evidence. You shift the burden of proof.

If any of my arguments have failed to ground themselves on the evidence right in front of us, that's because I'm spending the majority of my time debunking your unfounded claims. My evidence is there in the legislative history, and the burden of proof is on the one that wants to argue that "trade or business" means something that it hasn't meant since the Higgins case was decided in 1941.
 

#47
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
It doesn't say "active includes passive" or anything like that. It says an active trade or business may include "a trade or business that is in many respects passive".


As has been mentioned, you’re focus on the word “business,” and the misaligned meaning you attribute to it, is misplaced, in light of what the ’84 Report writers were trying to accomplish (i.e. plug the “212 activity which will always be a 212 activity” hole). Contemporaneous writings confirm this. It’s not my fault your research is deficient.

And you haven’t even noted this tid-bit in the 1980 Report:

…to constitute an active business (within the meaning of Code sec. 162)

Interesting. The problem is that Section 162 doesn’t speak to an “active trade or business.” But if that is the benchmark – that Section 162 only covers an active trade or business - I’d say that when the 1984 Report flipped things to “a trade or business that is in many respects passive,” that would push such an activity outside of the 1980 benchmark definition, with the result that such a passive “business” wouldn’t fall “within the meaning of Code sec. 162.” And lo and behold, the very next sentence in the 1984 report talks about a net lease. The 1984 Report writers were just addressing the actual words written by the 1980 Report writers.

When I question your perspective, you mount an unyielding defense.


It’s not just my perspective, quite clearly.
 

#48
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Jeff-Ohio wrote:you’re focus on the word “business,” and the misaligned meaning you attribute to it, is misplaced, in light of what the ’84 Report writers were trying to accomplish (i.e. plug the “212 activity which will always be a 212 activity” hole). Contemporaneous writings confirm this. It’s not my fault your research is deficient.

Don't shift the burden of proof. Until you can produce these contemporaneous writings, all you'll have to prove that's what they were trying to do is your "perspective".

…to constitute an active business (within the meaning of Code sec. 162)

Interesting. The problem is that Section 162 doesn’t speak to an “active trade or business.”

Unless you assume the term has the hidden meaning that you ascribe to it, section 162 absolutely speaks to it. Section 162 talks about "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". The "carrying on" requirement is exactly what this whole fuss has been about. It's one of the two primary justifications for the pre-opening expense doctrine, the other being distortion of income. The very purpose of section 195 is to address the transition from a business that is not being carried on to one that is being carried on.

There are many ways to express this idea. Section 195 uses the word "active". The 2011 Blue Book expresses the idea using the word "began". Case law is littered with various other ways of discussing it. Nothing in the primary sources requires us to read any further into the word "active" than this.

with the result that such a passive “business” wouldn’t fall “within the meaning of Code sec. 162.” And lo and behold, the very next sentence in the 1984 report talks about a net lease.

But nothing the 1984 report says conflicts with the notion of a section 162 business. Net leases do fall within the concept of a "trade or business". See Lewenhaupt v. Commissioner (20 T.C. 151), CRSO v. Commissoner (128 T.C. 12), and King v. Commissioner (458 F.2d 245). Because a net lease is quite passive but can still be a trade or business, it is a perfect example of how a trade or business can still be considered "active" even with little to no effort on the part of the taxpayer. In light of section 469, we might now characterize the trade or business as one with no material participation from the taxpayer. But these activities don't suddenly fail to count as trades or businesses for that reason alone.

The Committee Report illustrates that "active" is to be taken in the sense of opposition to "inactive", and not in the sense of opposition to "passive". Thus the word "active" is clarified, and there's no reason to read any further into it except for "perspective" or whatever contemporaneous writings you can come up with, if they exist.

It’s not just my perspective, quite clearly.

It's clear you believe there are contemporaneous writings that will confirm your perspective. What's not clear, so far, is whether those writings do in fact exist. The burden of proof is on you to produce them because of the radical shift in the meaning of the term "trade or business" that you are proposing.
 

#49
Posts:
3388
Joined:
21-Apr-2014 7:21am
Location:
The Land
Section 195 uses the word "active".


No kidding…but Section 162 doesn’t. Seems that if anyone is upsetting the definition of “trade or business,” it was the 1980 Report writers…

See Lewenhaupt v. Commissioner (20 T.C. 151), CRSO v. Commissoner (128 T.C. 12), and King v. Commissioner (458 F.2d 245).


And why don’t you see all the guidance that says otherwise, including the PLR that came out in 1983…after ’80 and before ’84.

In light of section 469, we might now characterize the trade or business as one lacking in material participation from the taxpayer. But these activities don't suddenly fail to count as trades or businesses for that reason alone.


Well, they very well might.

The burden of proof is on you


It’s not a heavy burden. All I need to point to is the blunt statement made by the judge in Rose, which comports with the status quo. And in the Charlton case referenced in Rose, there was no discussion of things like “anticipations” and whether or not the cabin rentals would be a 212 activity or a 162 activity. Rather, the judge just said the pre-opening costs were start-up costs. Courts are looking to see when something starts, and when it starts, everything incurred before then are simply labeled “start-up costs.”

And, of course, I’d also point to everything else I wrote in this thread, including Post #30, about that shake-up that Hoopengarner caused. While you might find it elusive, I’m pretty sure a judge wouldn’t, given the language they use in quickly dispatching with these cases.
 

#50
Chay  
Posts:
732
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
Jeff-Ohio wrote:
Section 195 uses the word "active".


No kidding…but Section 162 doesn’t. Seems that if anyone is upsetting the definition of “trade or business,” it was the 1980 Report writers…

Section 162 says "carrying on". Section 195 says "active". The 2011 Blue Book says "began". They all mean things have got to be up and running.

Sections 355 and 179 require "active conduct of a trade or business". In these cases, "active" means something different. There is a requirement for meaningful participation of the taxpayer in management and/or operations.

The PLR you referenced (PLR 8350008) requires "active conduct of a trade or business" for section 1231 to apply. 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.

It makes sense for the 1984 Committee Report drafters to want to clarify what is meant by active between all these different possibilities, and they did so. They steered us closer to the first meaning, and the 2011 Blue Book confirmed that meaning.

And why don’t you see all the guidance that says otherwise, including the PLR that came out in 1983…after ’80 and before ’84.

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.

In light of section 469, we might now characterize the trade or business as one lacking in material participation from the taxpayer. But these activities don't suddenly fail to count as trades or businesses for that reason alone.


Well, they very well might.

Yes, of course. Just like a net lease might not be a business. All I'm trying to show is that these aren't sure things.

All I need to point to is the blunt statement made by the judge in Rose, which comports with the status quo.

A statement whose meaning rests on the cases it cites, which don't support your point. A status quo which you haven't shown to exist.

And in the Charlton case referenced in Rose, there was no discussion of things like “anticipations” and whether or not the cabin rentals would be a 212 activity or a 162 activity.

Why no controversy as to the controlling section? Because the expenses would be capitalized regardless under the pre-opening expense doctrine. The amortization wouldn't have started until 1998, and that year wasn't at issue. Why no mention of the anticipation concept or something resembling it? Because there was not a separate ongoing activity at the time.

And, of course, I’d also point to everything else I wrote in this thread, including Post #30, about that shake-up that Hoopengarner caused.

That would be you pointing to your "perspective" and your special knowledge about what Congress was trying to accomplish with the last two sentences of the 1984 Report again.
 

Next

Return to Taxation



Who is online

Users browsing this forum: Andrew, Google [Bot], IDCPA, lucyko, Majestic-12 [Bot], ManVsTax, MSchmahl and 61 guests