Tax Court In Brief | Musselwhite v. Commissioner | Loss In Sale Of Real Estate: Ordinary Loss Or Capital Loss?

• Published date: 15 June 2022
• Subject Matter: Litigation, Mediation & Arbitration, Real Estate and Construction, Tax, Trials & Appeals & Compensation, Real Estate, Income Tax
• Law Firm: Freeman Law
• Author: Freeman Law

The Tax Court in Brief - June 6th - June 10th, 2022

Freeman Law's " The Tax Court in Brief" covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation: The Week of June 6th, 2022, through June 10th, 2022

• Pocock v. Commissioner, T.C. Memo 2022-55 | June 6, 2022 | Vasquez, J.| Dkt. No. 12558-17 Consolidated with Dkt. No. 23569-17L
• Spencer v Commissioner, T.C. Memo. 2022-8 | June 7 2022 | Marshall, J.| Dkt. No. 17106-19S
• Chinweze v. Comm'r, T.C. Memo 2022-56 | June 7, 2022 | Urda, J. | Dkt. No. 29940-15L

Musselwhite v. Commissioner, T.C. Memo. 2022-57 | June 8, 2022 | Ashford, J.| Dkt. No. 14380-16

Opinion

Summary: William Musselwhite was involved in real estate ventures since about 1986. In 2005, Musselwhite and his business partner formed DS & EM Investments, LLC (DS&EM). In 2006, DS&EM purchased 4 unimproved lots for $1 million from Adam Lisk. DS&EM re-platted the 4 lots into 9. The terms of agreement with Lisk included certain guarantees-of-resale-within-one-year, allocation of ownership of the 9 lots (4 with DS&EM and 5 with Lisk), buy-back provisions, and other conditions relating to the development and sale of the lots, including that Lisk would complete improvements on some of them. DS&EM financed the purchase price with a loan from BB&T Bank. In 2007, the real estate market crashed, and due to incomplete improvements and lack of sales per the deal, DS&EM sued Lisk. In 2008, and in order to resolve the lawsuit, Lisk transferred his 5 lots (now partially improved) to DS&EM. Thereafter, no improvements were made to those 5 lots and the development activities all but ceased. BB&T subsequent appraisals of the lots indicated that the property was not known to be for sale. Due to the depressed real estate market, DS&EM and its two members (Musselwhite and his business partner) divided up their various properties and debts, and DS&EM distributed the 4-of-9 lots to Musselwhite. Within 4 months of receiving the 4 lots, Musselwhite sold them for $17,500, realizing a loss of $1,022,726. On Musselwhite's 2012 Form 1040, he (and his wife filing jointly) reported a Schedule C business loss deduction loss of $1,022,726 relating to the sale of the 4 lots which Musselwhite reported as cost of goods sold. Following an exam of Musselwhite's 2012 Form 1040, the IRS...