Key Issues:The sole issue is whether the $1,022,726 loss should be characterized as an ordinary loss or as a capital loss. The issue hinges on whether the lots were, pursuant to 26 U.S.C. § 1221(a)(1), “stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.” If they were, then their sale resulted in an ordinary loss and not a capital loss.Primary Holdings:The Tax Court found that the lots were capital and not stock in trade as defined in section 1221(a)(1).

exceptions. Some of the more important IP related exceptions include:Stock in Trade. Property held in a business primarily for sale to customers is excluded from the definition of capital asset. While IP may not classically be thought of as inventory, professional (or even consistent) inventors may find their creations subject to the inventory exception. For example, where an inventor had 37 inventions over a 19 year period, the courts found such regularity indicated the inventor “was in the business of selling and licensing his inventions” and it follows “the patents…were not to be regarded as capital assets, or the profits from their sale by him as capital gains.”Depreciable Property. Amortizable section 197 intangibles are treated as property subject to the allowance for depreciation and are therefore excluded from the definition of capital asset.Self-Created Patents and Designs. Before the Tax Cuts and Jobs Act (“TCJA”) patents developed via “personal efforts” were not included in § 1221(a)(3)’s capital asset exclusion while copyrights were. But, the TCJA facially excluded personally developed patents, inventions, models or designs, or secret formulas or processes from the capital asset definition. While the foregoing statutory change did eliminate one avenue for achieving capital gains on self-created patent sales, it at least clarified that IP capable of both patent and copyright protection cannot be capital assets. Individual inventors therefore need to look to § 1235 to obtain capital gain treatment on the taxable disposition of self-created patents.Finally, capital gain or loss treatment is not always assured even if the capital asset definition appears to apply. Taxpayers should consider the Code’s loss disallowance, netting, and recharacterization rules.But We Drafted a Purchase Agreement! Sale Versus License and Other MinutiaDistinguishing a patent sale from a license is not always easy. To be a sale, courts historically require that all substantial rights to the as

pt is applied, pursuant to which the partner may have to characterize part of the gain from the sale of the interest as ordinary income, base upon the partner’s “share” of such assets.The CCA rightly points out that the foregoing analysis depends upon the partnership interest being treated as a capital asset in the hands of the selling partner. Where the seller is effectively acting as a dealer, the nature of the underlying assets never comes into play in determining the nature of the gain from the sale. Not to be confused with Miles’s Law: “Where you stand depends on where you sit.” Does it represent a loan, a contribution to capital, a distribution, payment for services, a gift, etc. IRS CCA 202309015, Chief Counsel Advisory March 3, 2023.A Chief Counsel Advisory (CCA) is written advice prepared by the Office of Chief Counsel and issued to field or service center employees of the IRS. It is intended to convey a legal interpretation of the Code. It is not intended to be precedential. IRC Sec. 1221. IRC Sec. 751. See Notice 2017-10 in which the IRS identified certain “syndicated conservation easement (“SCE”) transactions as listed (tax evasion) transactions. See also IRC Sec. 170(h); Reg. Sec. 1.170A-14. Syndicated conservation easements. In general, the transaction steps were the same when a Transaction LLC donated easements and/or the land. Taxpayer reported the activities of the LLCs as partnerships for federal tax purposes. IRC Sec. 170. As reflected on their respective Schedules K-1. The Consolidated Appropriations Act of 2023 (P.L. 117-328) amended IRC Sec. 170(h) to limit what Congress and the IRS determined was the abuse of syndicated conservation easements.Specifically, it provides that a contribution by a partnership (whether directly or as a distributive share of a contribution of another partnership) will not be treated as a qualified conservation contribution for purposes of IRC Sec. 170(h) if the amount of such contribution exceeds 2.5 times the sum of each partner

The Lots were treated as “inventory.” See IRC Sec. 1221(a)(1).The Court stated that whether property is described in IRC Sec. 1221(a)(1) is a factual question, and the burden of proof was on Taxpayer to demonstrate that they held the Lots as described in section 1221(a)(1), and not as a capital asset.

[8]Sale of a Contract: Capital Gain or Ordinary Income?[9] IRC Sec. 1221(a)(2).[10] See FN 6, FN 9, and accompanying texts.

the time of the hedge?Yes. A taxpayer can hedge interest rate risk on a debt instrument that it anticipates issuing in the future—as long as the hedge meets the tax hedge definition, and the taxpayer properly identifies the anticipatory debt instrument.[3]Can a “treasury lock agreement” be treated as a tax hedge?Yes. A treasury lock agreement, also known as a forward rate agreement or FRA, is an over-the-counter (OTC) bilateral agreement to exchange interest rate payments based on an agreed-upon notional principal amount. The treasury lock defines the interest rate to be paid at maturity of the lock agreement. Typically, one party pays a fixed interest rate while the other party pays a floating rate. Borrowers often enter into treasury locks to fix future borrowing costs, while lenders often seek to lock in specific interest rates in the event that market rates fall while the treasury lock is in place.Treasury locks can qualify as tax hedges if they meet the tax hedge requirements at Internal Revenue Code §§ 1221(a)(7) and 1221(b)(2), and Treas. Reg. § 1.1221-2(b). To qualify as a tax hedge, the treasury lock must be reasonably expected to manage the taxpayer’s risk; it must be identified before the close of the day on which it is entered into; and the hedged item (anticipated debt issuance) must be identified on a substantially contemporaneous basis with the hedge. “Reasonable expectation” is a term that can be hard to define and harder to prove, but taxpayers need to pay attention to this requirement.Must a taxpayer manage 100 percent of its risk with respect to a hedged item?No. A taxpayer “may hedge all or any portion of its risk for all or any part of the period during which it is exposed to the risk.”[4] For example, a manufacturer holds one hundred units of a commodity that is an ordinary asset in its hands and that is exposed to price fluctuations for a 180-day period. The manufacturer can hedge none, all, or anywhere between zero and one hundred units of that commodity.Once a taxpayer enter

Given that the use of margin can significantly affect the gain (or loss) on the sale of cryptocurrencies, traders should be generally aware of the tax implications on crypto margin trading, especially in light of increased scrutiny from the IRS and Congress. I.R.C. § 1001.See I.R.C. §§ 1011, 1012.See I.R.C. §§ 1221, 1222.See I.R.C. §§ 1(h), 1221, 1222. I.R.C. § 163(d)(1).

The proposed regulations arrive at this result through a technical analysis.The TCJA recharacterizes long-term capital gain as short-term capital gain from the sale of a capital asset held for more than a year, but not more than three years, by cross referencing Section 1222 of the IRC, which in turn references the definition of capital asset in Section 1221 of the IRC. Explicitly excluded from the definition of capital asset in IRC Section 1221 is depreciable property used in the taxpayer’s trade or business or real property used in the taxpayer’s trade or business. The reason that some sales of real property (other than dealer property) are afforded long-term capital gain treatment is that IRC Section 1231 provides long-term capital gain treatment for such sales.

higher income tax and Medicare tax: year-end bonuses, change-in-control payments, compensatory stock transfers, the exercise of compensatory options, failed ISOs, stock appreciation rights, and payments pursuant to nonqualified deferred compensation plans (of which there are many forms). In other words, practically every incentive arrangement used by employers to retain, motivate, and reward good employees. The current 37% rate applies to taxable income over $731,200 for a married couple filing jointly. Under the proposal, the same taxpayers would be subject to the top rate of 39.6% for taxable income over $450,000. See IRC Sec. 1239 with respect to property that is depreciable in the hands of the buyer; see IRC Sec. 707(b) with respect to the sale of property between a partner and their partnership, or between two related partnerships, where the property sold is not a capital asset in the hands of the buyer. For example, gain from the sale of shares of stock and other capital assets (IRC Sec. 1221), and gain from the sale of IRC Sec. 1231 property, including real property used in a trade or business. The highest ordinary income rate would be 39.6%. The NIIT rate (discussed below) would be 5%. Do the math. By contrast, the rules that would be applicable to the gain arising from the deemed sale of such assets appear to be more forgiving. See the last post. IRC Sec. 1411. Employment taxes under the Self-Employment Contributions Act (SECA). Material participation standards would apply to individuals who participate in a business in which they have a direct or indirect ownership interest. Taxpayers are usually considered to materially participate in a business if they are involved in it in a regular, continuous, and substantial way. Often this means they work for the business for at least 500 hours per year. The statutory exception to SECA tax for limited partners would not exempt a limited partner from the NIIT if the limited partner otherwise materially participated. In short, the

and do not necessarily represent the views of the Firm. IRC Sec. 1. The maximum rate is scheduled to revert to 39.6% in 2026, with the sunset of many other Code provisions enacted by the Tax Cuts and Jobs Act (Pub. L. 115-97).The 3.8 percent surtax on net investment income may also apply to this income. IRC Sec. 1411. IRC Sec. 1239. Thus, if a taxpayer were to sell an improved real property to a purchaser that is “related” to the taxpayer, the portion of the gain attributable to the depreciable improvement (say, a building) may be taxed as ordinary income.The underlying theory: a taxpayer should not be able to realize capital gain on a sale that provides a related party with a cost basis that may be recovered against ordinary income through depreciation. Not necessarily a partner. IRC Sec. 707(b)(2). For example, the entire gain from a sale of real property between related partnerships, may be taxed as ordinary income if the property is not a “capital asset” in the hands of the buyer. IRC Sec. 1221. For example, real property that is held for use by the taxpayer in the taxpayer’s trade or business. IRC Sec. 267(a)(1); Sec. 707(b)(1).The underlying theory: the property may still appreciate in the hands of the related buyer and, so, the related parties as a whole will not have realized a loss.It should be noted that if a taxpayer acquires property by purchase from a related transferor who, on the transaction, sustained a loss not allowable as a deduction by reason of IRC Sec. 267(a)(1) or Sec. 707(b)(1), then any gain realized by the taxpayer on a later sale of the property is recognized only to the extent that the gain exceeds the amount of the loss allocable to the property. IRC Sec. 267(d); Reg. Sec. 1.267(d)-1(a)(1); the penultimate sentence of Sec. 707(b)(1). IRC Sec. 707(b). IRC Sec. 267(b). The other covered relationships are as follows:A grantor and a fiduciary of any trust;A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both tru