# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

T.C. Memo. 2005-127

UNITED STATES TAX COURT

DAVID TAYLOR ENTERPRISES, INC. & SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7698-03.

Filed May 31, 2005.

Lawrence Sherlock and Juan F. Vasquez, Jr., for petitioner.
Derek B. Matta, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION
KROUPA, Judge:

Respondent determined deficiencies of

$431,1141 for 19992 and $113,390 for 2000 in petitioner’s Federal
income taxes.

The issue to be decided is whether losses realized

1

All amounts have been rounded to the nearest dollar.

2

Petitioner’s tax year ended June 30.

- 2 on the sale of classic cars during the years at issue are capital
or ordinary losses under section 1221(a).3

Resolution of this

issue depends on whether the classic cars were held primarily for
sale to customers in the ordinary course of business or were held
instead for investment purposes.

We hold that petitioner held

the classic cars for sale to customers.
FINDINGS OF FACT
The parties have stipulated some facts.

The stipulation of

facts and accompanying exhibits are incorporated by this
reference and are so found.
David Taylor Enterprises
Petitioner is an affiliated group of corporations that files
consolidated income tax returns.

See sec. 1501.

The common

parent of the affiliated group is David Taylor Enterprises, Inc.
(DTE).

Until his death, David Taylor, Sr. (Mr. Taylor) owned all

the shares of DTE.

DTE’s principal place of business was

Houston, Texas, at the time it filed the petition.
David Taylor Cadillac
Cars were Mr. Taylor’s love and passion, and he was involved
in the car business throughout his life.

When he was a child,

Mr. Taylor’s father was an Oldsmobile-Cadillac dealer in Port

3

All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.

- 3 Arthur, Texas.

From 1975 until his untimely death in 1997, Mr.

Taylor was a car dealer and engaged in the trade or business of
selling cars.

Mr. Taylor was also a member of the Houston Auto

Dealers Association, the Texas Auto Dealers Association, and the
National Auto Dealers Association.
In 1974, Mr. Taylor sold a Buick Dealership in Beaumont,
Texas, and a year later acquired the right from General Motors to
open a Cadillac dealership in Houston, Texas, known as David
Taylor Cadillac (the dealership).

The dealership was one of the

largest Cadillac dealers in the world, and was, at the time of
trial, a subsidiary of petitioner.

The dealership is the main

focus of our case.
The dealership owned new, used, and classic cars.

The new

and used cars were located in Houston, Texas, while the classic
cars were located in Galveston, Texas.
Classic Cars
The dealership began to acquire classic cars in 1979.4
Initially, the dealership purchased a 1931 Cadillac Roadster for
$40,000.

The dealership then purchased two classic cars in the

mid-1980s, a 1934 Ford Roadster and a 1932 Ford Victoria, that
came as kits and required assemblage.

After the initial

purchases, the dealership acquired additional classic cars,

4

Classic cars are cars whose model year is generally 1970 or
before. The dealership applied for exhibition license plates for
its classic cars, indicating the cars were at least 25 years old.

- 4 either by purchase, exchange of one classic car for another, or
as trade-ins from new car customers to reduce the purchase price
of a new Cadillac or Buick.

The dealership’s purpose in

acquiring the classic cars was to enhance their value by
restoring them and selling them at a premium price.5
The dealership viewed potential buyers of the classic cars
as a select group of mostly wealthy classic car enthusiasts, and
designed a strategy to reach them.

The dealership’s strategy

involved building the dealership’s reputation as a source of high
quality classic cars by entering the cars in auctions, auto
shows, classic car competitions, and displaying them at
promotional events for the dealership or third parties.

For

instance, the classic cars were displayed at events frequented by
wealthy individuals, like the Alley Theatre and the annual
Lakewood Yacht Club Wooden Keels and Classic Wheels event.

The

classic cars were also prominently advertised in brochures,
booklets, newspapers, and magazine articles, and a placard
describing each car was also placed on each vehicle.
Potential buyers of the classic cars were directed to Mr.
Taylor or a broker the dealership hired after Mr. Taylor died.

5

The classic cars were insured, and the insurance policy
covered “all owned antique, classic and special interest cars
held for sale by the insured.” The classic cars were also taxed
by local property taxing authorities as “motor vehicle
inventory.”

- 5 Until his death, Mr. Taylor personally negotiated the sales of
the classic cars.
To command a premium price for the classic cars, a priority
for the dealership and Mr. Taylor, the classic cars had to be
restored to classic condition, maintained, and driveable at any
time by potential customers.

Restoring the cars involved a long

process of fundamentally rebuilding the car to near perfection.
After the cars were fully restored, the dealership carefully
maintained them by setting the cars on jack stands so the tires
maintained air pressure, starting the engines every 6 weeks, and
changing the oil every 6 months.
In addition, the dealership kept the classic cars indoors to
protect them from inclement weather.

Initially, the classic cars

were kept at the dealership or in Mr. Taylor’s garage, and later
were moved to a building the dealership bought that was located
across the street from its main showroom.

The cars were

eventually moved to three adjacent buildings in Galveston, Texas
(the Galveston property)6 that the dealership purchased to
provide the classic cars with a climate-controlled environment
and to expose them to the public.7

6

The Galveston property was acquired by David Taylor Realty,
Inc., another member of the affiliated group.
7

Petitioner decided to operate the Galveston property as a
museum and charge admission. Petitioner named the property the
David Taylor Classic Car Museum. Operating the Galveston
(continued...)

- 6 The dealership intended to recoup its costs of restoring the
classic cars by selling them at a profit.

In 1990, the

dealership sold a Packard convertible for $330,000, earning a
profit of $143,340.

The dealership made three more sales that

year, and three in the succeeding year.8

The dealership

thereafter strategically began acquiring more classic cars and
increasing its participation in promotional events to generate
interest, win competitions, and service the wealthy clientele the
dealership hoped would follow.

This plan was abruptly derailed

in 1997 when Mr. Taylor died, within a month of being diagnosed
with lung cancer.
Mr. Taylor’s shares in the dealership represented most of
the value of his estate.

To raise money for the estate tax, Mr.

Taylor’s estate requested a liquidation of the DTE shares.
Petitioner agreed to a section 303 stock redemption and resolved
to sell the classic cars to raise the necessary capital.

The

dealership hired a broker and sold approximately 69 classic cars
during 1999 and 2000, the years at issue.

7

(...continued)
property as a museum allowed the dealership to recoup some of the
overhead costs for maintaining and storing the cars, while still
holding them for sale. The museum was open to the public from
1989 through 1999.
8

The dealership sold a total of 11 vehicles and made 6
trades prior to the years at issue.

- 7 The dealership accounted for the new, used, and classic cars
consistently.

Every car was treated as inventory and assigned an

individual stock number.

Costs associated with the purchase and

restoration of the classic cars were posted to the car’s stock
number, which allowed a running total of the dealership’s cost
basis in each car.

The dealership did not deduct any costs as

they were incurred, nor did the dealership depreciate any of the
cars.

No part of the dealership’s cost basis in any classic car

was recognized except when the car was sold or disposed of.

The

dealership included the sales price of the car, whether new,
used, or classic, in the dealership’s gross receipts and included
all accumulated costs of each specific car in the costs of goods
sold.
Whenever a car was sold, whether new, used, or classic, the
dealership reported the gain or loss on the sale at ordinary
income rates.

For all years prior to the years at issue, the

dealership reported sales on 11 classic cars at ordinary income
rates.

During the years at issue, the dealership reported sales

on 69 cars, also at ordinary income rates.9

9

For example, the dealership acquired the 1939 Packard in
1989, sold it for $330,000 in 1990, and had total accumulated
costs of $160,260. After paying a commission on the sale of
$26,400, the dealership reported an ordinary gain of $143,340 on
its tax return for the tax year ended June 30, 1991.

- 8 Petitioner timely filed its Forms 1120, U.S. Corporation
Income Tax Return, for 1999 and 2000, reporting the losses at
issue.

Upon examination of those returns, respondent issued a

Notice of Deficiency to petitioner on February 25, 2003,
determining that the classic cars were held for investment
purposes and should be accorded capital loss treatment, not
ordinary loss.
Petitioner filed a petition contesting respondent’s
determination and argued that the classic cars were held for sale
and should be accorded ordinary income treatment.

We must

therefore determine whether the losses from the sales of the
classic cars are ordinary or capital losses.
OPINION
We are asked to decide whether the dealership held the
classic cars for investment or for sale.

If the dealership held

the classic cars as capital assets for investment, then we must
sustain respondent’s determination.10

Conversely, if the

10

A “capital asset” is broadly defined as property held by
the taxpayer, whether or not connected with his trade or
business, subject to a number of exceptions. Sec. 1221(a).
These exceptions include stock in trade, property of a kind that
is properly included in a taxpayer’s inventory, and property held
primarily for sale to customers in the ordinary course of a
taxpayer’s trade or business. Sec. 1221(a)(1).
The U.S. Supreme Court has defined “primarily” as used in
sec. 1221(1) to mean “principally” or “of first importance.”
Malat v. Riddell, 383 U.S. 569, 572 (1966); Biedenharn Realty Co.
v. United States, 526 F.2d 409, 422-423 (5th Cir. 1976). The
(continued...)

- 9 dealership held the classic cars for sale to customers, then we
must find for petitioner.

We begin with who has the burden of

proof.
A.

Burden of Proof
The Commissioner’s determination in the notice of deficiency

is generally presumed to be correct, and the taxpayer bears the
burden of proving otherwise.
290 U.S. 111, 115 (1933).

Rule 142(a); Welch v. Helvering,

If a taxpayer introduces credible

evidence with respect to a factual issue relevant to ascertaining
the taxpayer’s tax liability, however, the burden shifts to the
Commissioner with respect to that issue, assuming the taxpayer
meets certain other requirements.11

Sec. 7491(a)(1).

The burden

of proof does not shift unless the taxpayer has complied with the
substantiation requirements, maintained required records, and
cooperated with the Commissioner’s reasonable requests for
witnesses, information, and meetings.
(B).

Sec. 7491(a)(2)(A) and

The taxpayer has the burden of establishing that each

requirement of section 7491(a)(2) has been met.
Commissioner, 116 T.C. 438 (2001).

Higbee v.

Respondent concedes that

10

(...continued)
question whether property is held primarily for sale to customers
in the ordinary course of one's business is "purely factual."
Pritchett v. Commissioner, 63 T.C. 149, 162 (1974).
11

Sec. 7491(a) applies to examinations commenced after July
22, 1998, and therefore applies to this case involving tax years
1999 and 2000.

- 10 petitioner has met the cooperation and substantiation
requirements, but argues that petitioner has not met the credible
evidence requirement.

We disagree.

Credible evidence means the quality of evidence the Court
would find sufficient upon which to base a decision on the issue
if no contrary evidence were submitted.

See H. Rept. 105-599, at

240-241 (1998), 1998-3 C.B. 747, 994-995; see also Blodgett v.
Commissioner, 394 F.3d 1030 (8th Cir. 2005), affg. T.C. Memo.
2003-212; Edwards v. Commissioner, T.C. Memo. 2005-52.
Petitioner introduced evidence with respect to the factual
issue in the case, through witness testimony and business records
of the dealership, sufficient, in the absence of contrary
evidence, to prove by a preponderance of the evidence that the
classic cars were inventory held primarily for sale to customers
in the ordinary course of business.

Specifically, petitioner

produced evidence that it advertised the classic cars for sale,
sold a substantial number of classic cars, and consistently
reported the sales at ordinary income rates and consistently
treated the classic cars as inventory on its corporate books.
find this evidence credible as to the factual issue in dispute
and thus sufficient to shift the burden to respondent under

We

- 11 section 7491 to prove the classic cars were held as an investment
and subject to capital treatment.12
B.

Williford Factors
Our Court generally uses a number of factors to determine

whether property is held for investment or held for sale.
Williford v. Commissioner, T.C. Memo. 1992-450.13

See

In Williford,

we examined whether a taxpayer’s art collection was held
primarily for sale to customers in the ordinary course of
business.

The taxpayer in Williford was a part-time art dealer

12

Petitioner also argues that respondent must abide by Rev.
Rul. 75-538, 1975-2 C.B. 35, which presumes that a taxpayer
engaged in the trade or business of selling motor vehicles holds
its vehicles primarily for sale, and not as an investment. We
find it unnecessary to address Rev. Rul. 75-538, supra, because
we find that the evidence favors petitioner’s position as to the
character of the classic cars, irrespective of the presumption.
13

Other courts use similar factors to determine whether
property is held for investment or for sale. For example, the
Court of Appeals for the Fifth Circuit, where appeal will lie,
uses the following factors: (1) The nature and purpose of the
acquisition of the property and the duration of the ownership;
(2) the extent and nature of the taxpayer’s efforts to sell the
property; (3) the number, extent, continuity and substantiality
of the sales; (4) the extent of subdividing, developing, and
advertising to increase sales; (5) the use of a business office
for the sale of the property; (6) the character and degree of
supervision or control exercised by the taxpayer over any
representative selling the property; and (7) the time and effort
the taxpayer habitually devoted to the sales. United States v.
Winthrop, 417 F.2d 905, 909-910 (5th Cir. 1969) (citing Smith v.
Dunn, 224 F.2d 353, 356 (5th Cir. 1955)); see also Howell v.
Commissioner, 57 T.C. 546, 554 (1972) (six factors); Maddux
Constr. Co. v. Commissioner, 54 T.C. 1278, 1284 (1970) (nine
factors). The factors are usually used to classify real estate.
In Williford v. Commissioner, supra, the factors were used to
classify artwork. We have found no cases where the factors were
used to classify cars.

- 12 and bought some paintings for resale and others for investment.
The taxpayer kept separate his private art collection and the
paintings for resale.

The taxpayer classified the paintings in

his private collection as capital assets and reported capital
gains on the sale of these paintings.

The Commissioner objected

to the capital treatment, arguing that the taxpayer was an art
dealer and derived the sales proceeds in the ordinary course of
business.

The Tax Court agreed with the taxpayer and held that

the paintings were capital assets held for investment.
The Court used eight factors to analyze whether the art
collection was held primarily for sale to customers in the
ordinary course of the taxpayer’s trade or business.
factors are:

The eight

(1) Frequency and regularity of sales; (2) the

substantiality of sales; (3) the duration the property was held;
(4) the nature of the taxpayer’s business and the extent to which
the taxpayer segregated the collection from his or her business
inventory; (5) the purpose for acquiring and holding the property
before sale; (6) the extent of the taxpayer’s sales efforts by
advertising or otherwise; (7) the time and effort the taxpayer
dedicated to the sales; and (8) how the sales proceeds were
used.14

14

Williford v. Commissioner, supra; see also Bramblett v.

Petitioner and respondent both deem the last factor
inconclusive and not relevant, and we therefore do not address
it. Generally, this factor indicates that assets are held for
sale where the taxpayer uses sales proceeds to replenish
(continued...)

- 13 Commissioner, 960 F.2d 526 (5th Cir. 1992); Suburban Realty Co.
v. United States, 615 F.2d 171 (5th Cir. 1980); Biedenharn Realty
Co. v. United States, 526 F.2d 409 (5th Cir. 1976).

We apply

these factors to determine whether the dealership held the
classic cars for investment or for sale.
1.

Frequency and Regularity of Sales

The frequency and regularity of sales are among the most
important factors in determining whether an asset is held for
investment or as inventory.

Suburban Realty Co. v. United

States, supra at 176 (cited by Williford v. Commissioner, supra);
see also Biedenharn Realty Co. v. United States, supra at 416;
Buono v. Commissioner, 74 T.C. 187, 199 (1980); Goldberg v.
Commissioner, 223 F.2d 709 (5th Cir. 1955) (frequency of sales
alone is not sufficient to establish a taxpayer is engaged in
selling assets as a business).

The inference, generally, is that

frequent sales serve as an indicium that the assets are being
held for sale, while infrequent sales serve as an indicium that
the assets are being held for investment.
Whether the number of sales was sufficiently frequent must
be viewed in the context of the particular industry at issue.

14

(...continued)
inventory. See Williford v. Commissioner, supra (citing Bittker
& Lokken, Federal Taxation of Income, Estates and Gifts, par.
51.2.3, at 51-18, par. 51.2.4, at 51-23 (2d ed. 1990); Ross v.
Commissioner, 227 F.2d 265, 268 (5th Cir. 1955); and Goldberg v.
Commissioner, 223 F.2d 709, 713 (5th Cir. 1955), revg. 22 T.C.
533 (1954)).

- 14 Respondent and petitioner have provided us with no caselaw
concerning the sale of classic cars, or cars in general, but
rather have highlighted cases concerning sales of real estate and
artwork.15

Each case turned on the unique facts at issue, and we

can discern no standard from the caselaw to apply here.

We

therefore view the frequency of sales factor in the context of
our own facts and apply no standardized test to determine whether
the sales were sufficiently frequent.
Petitioner sold 80 cars over approximately 12 years.16

The

parties focus on different time periods to support their
arguments.

Petitioner focuses upon the higher number of sales in

the years at issue to argue that the cars were held for sale as
inventory.

In contrast, respondent focuses upon the smaller

number of sales between 1989 and 1998 to argue that the cars were
held for investment purposes.

The holding purpose inquiry begins

at the time the property is acquired and spans the entire course

15

Real property was held for sale where the taxpayer sold 37
lots in 3 years, and 10 lots in 2 years. See Biedenharn Realty
Co. v. United States, 526 F.2d at 416; Thompson v. Commissioner,
322 F.2d 122, 124-125 (5th Cir. 1963), affg. in part and revg. in
part 38 T.C. 153 (1962). Artwork was held for investment where
the taxpayer sold eight paintings in 2 years. See Williford v.
Commissioner, supra.
16

The dealership owned more than 80 classic cars during the
time that the museum was open.

- 15 of ownership.17

Suburban Realty Co. v. United States, supra at

183.
We first note that sales increased in the years at issue for
understandable reasons.

Mr. Taylor died unexpectedly at age 60,

and petitioner’s board agreed to redeem the shares of DTE under
section 303 that Mr. Taylor owned before his death.

The increase

in sales does not negate a finding that the cars were previously
held for sale.

Petitioner explains that the dealership sold

fewer classic cars in the earlier years because it was in the
nascent phase of building inventory, restoring the cars,
establishing a reputation, and publicizing the classic cars to
potential clientele, but that the cars were nonetheless held for
sale at all times.18

We found testimony for the dealership

compelling, and find the total number of sales, 80 sales over 12
years, and 69 sales over the 2 years at issue, sufficiently
frequent to support a finding that the classic cars were held for
sale.

This factor favors petitioner.

17

We also note that we need not decide the “precise moment”
that the cars were held for sale under Fifth Circuit caselaw.
See Suburban Realty Co. v. United States, 615 F.2d 171, 184 n.36
(5th Cir. 1980).
18

Specifically, four were sold in 1990, three were sold in
1991, three were sold in 1997, one was sold in 1998, and the
remainder were sold in 1999 and 2000.

- 16 2.

Substantiality of Sales

Courts generally view frequent sales generating substantial
income as tending to show that property was held for sale rather
than for investment.

Suburban Realty Co. v. United States, supra

at 181; Biedenharn Realty Co. v. United States, supra.

Where

substantial profits result from capital appreciation, however,
and not from the taxpayer’s efforts, infrequent sales generating
large profits tend to show that the property was held for
investment.

Williford v. Commissioner, T.C. Memo. 1992-450

(citing Bramblett v. Commissioner, supra).
While the cars in this case appreciated in value, most of
the gains from the sales were due to the dealership’s efforts in
restoring and refurbishing the cars.

Further, the dealership

consistently sold the classic cars before the years at issue for
a profit, with the exception of two sales.

The dealership

reported all sales at ordinary income rates, as it did for sales
of new and used cars.
3.

This factor favors petitioner.

Duration of Ownership

Longer holding periods suggest an asset is held for
investment.

See Williford v. Commissioner, supra.

The Court in

Williford found that holding periods of 19 years and 13 years
served as indicia that the paintings were held for investment.
The classic cars in this case were held 7 to 10 years.

Of the

classic cars sold prior to the years at issue, seven were held

- 17 less than 2 years, one was held less than 4 years, and one was
held less than 10 years.

None of the classic cars were held for

as long as the periods set forth in Williford.
Moreover, in Williford, the paintings did not require work
akin to the extensive time and effort the dealership devoted to
refurbishing and restoring the classic cars.

The attendant

length of ownership is therefore longer in the case of valueadded classic cars.

In comparison, the dealership’s new and used

cars were held shorter periods for readily apparent reasons.
Respondent’s argument comparing the shorter periods for the new
and used cars vis-a-vis the classic cars, therefore, is not
dispositive.
The value of the new and used cars, as petitioner explained,
depreciated quickly, demanding quicker turnover.

In contrast,

the classic cars appreciated in value over time and,
consequently, did not necessitate the same rapid turnover period.
We find, therefore, that the holding period for the classic cars
is consistent with finding the dealership held the classic cars
for sale.
4.

This factor favors petitioner.
Segregation of Classic Cars From New and Used Cars

Property held for sale and property held for investment must
be separately identified.

Scheuber v. Commissioner, 371 F.2d

996, 998-999 (7th Cir. 1967), revg. T.C. Memo. 1966-107 (cited by
Williford v. Commissioner, supra); Frank H. Taylor & Son, Inc. v.

- 18 Commissioner, T.C. Memo. 1973-82 (cited by Williford v.
Commissioner, supra).

This factor suggests property segregated

from other property may indicate some assets are held for
investment while others are held for sale.
In Williford, the Court found that the paintings held as
inventory were kept in a location separate from those held for
investment.

While the classic cars were physically segregated

from the new and used cars, we find the physical segregation of
the cars of no moment.
locations.

A dealership could have numerous physical

The fact remains that the classic cars were on

display to the public at all times in contrast to the paintings
the taxpayer held in his home that were not on display to the
public.

Moreover, the classic cars were held separately in

buildings on the Galveston property because they required
protection from the elements, unlike the new and used cars.
Nor do we find segregation of the cars for book purposes
significant.

Petitioner explained that it grouped the classic

cars as “other assets” because “current assets” were those that
could be converted to cash within a year.

Because the classic

cars were not typically sold within a year, they were listed
under “other assets.”

This method is consistent with generally

accepted accounting principles.

- 19 Overall, we do not find the segregation of the dealership’s
classic cars relevant to our determination whether they were for
investment or for sale.
5.

We therefore find this factor neutral.

Purpose of Acquisition

This factor relates to whether the taxpayer intended to hold
the property for sale or to hold the property for investment.
Williford v. Commissioner, supra.

Respondent argues that the

dealership’s application for “exhibition” license plates
indicates that the dealership did not hold the classic cars for
sale.

Instead, respondent argues that the exhibition plates

essentially meant the classic cars were not for sale.

As

petitioner countered, the exhibition plates did not restrict the
cars from being sold but merely were a means of informing the
public that the classic cars were at least 25 years old.
Respondent also argues that the dealership acquired the
classic cars to hold them for investment because Mr. Taylor was
“passionate” about cars in general and classic cars in
particular.

Testimony established that every classic car the

dealership owned was acquired so it could be sold for a profit.
We do not find it relevant whether Mr. Taylor was passionate
about classic cars.
The dealership’s accounting treatment of the classic cars
was no different from the new or used cars.

Each car, whether

new, used, or classic, was assigned a stock inventory number.

- 20 Any costs associated with the car were added to the basis of that
car, and no depreciation or current deduction was claimed.

The

dealership reported each car sale, whether new, used, or classic,
as a sale of inventory at ordinary income rates.

See Daugherty

v. Commissioner, 78 T.C. 623, 630-631 (1982) (an important way of
determining the taxpayer’s intent in holding the property is how
the property was handled on the taxpayer’s books and records).
That the dealership reported sales at ordinary income rates in
the 10 years prior to the years at issue and consistently held
the classic cars out to third parties as inventory bolsters its
argument that its purpose was to hold the cars for sale.
Further, we cannot accept respondent’s assertion that the
primary holding purpose of the classic cars was merely to exhibit
them as “museum pieces”.

We question whether the dealership

would expend effort to acquire, rebuild, and maintain the classic
cars if the purpose were merely to display them, stationary, at a
museum.

On the contrary, each car was rebuilt to near

perfection, and the dealership maintained standards so that each
car could be driveable at any time and therefore command the
highest price.

The dealership started the car engines every 6

weeks and changed the oil every 6 months to maintain them in
driving condition.

Designating the Galveston property as a

museum made business sense as a means to gain exposure for the

- 21 classic cars specifically and the dealership in general, and to
cover overhead.
We found the testimony that the classic cars were acquired
as inventory to be honest, forthright, and credible.

This factor

favors petitioner.
6.

Sales and Advertising Effort

Sales and advertising efforts indicate the assets are held
for sale, not investment.

Respondent argues that the dealership

did not advertise the classic cars for sale and compares the
advertising strategies the dealership used to market the new and
used cars with the less overt methods the dealership used to
market the classic cars.

Again, we find this analogy artificial.

The holding period was shorter for new and used cars, and the
advertising methods consequently more immediate.

The dealership

could be selective in its sales so long as its activity was
consistent, overall, with its treatment of the classic cars as
inventory for sale.
Petitioner argues that the dealership used various
advertising methods to market the classic cars for sale.

These

included entering the cars in auctions and auto shows, displaying
the cars at numerous events frequented by wealthy individuals,
hosting events at the Galveston property for wealthy car
enthusiasts, designing and printing brochures featuring the cars,
arranging for newspaper and magazine articles about the cars,

- 22 displaying the cars at the dealership and promotional events, and
publishing a large booklet on the cars.

Personnel of the

dealership testified that they referred serious inquiries
regarding the classic cars to Mr. Taylor, or to a broker retained
by the dealership after Mr. Taylor died.

There was also

testimony that Mr. Taylor was frequently on the Galveston
property negotiating with interested buyers.
We find that the dealership always held the classic cars as
inventory for sale.

The dealership was merely more flexible

regarding the classic car’s price during the years at issue
because of the immediate need for capital.

In addition, we find

that the dealership made efforts to advertise and sell the
classic cars in years before those at issue.

Mr. Taylor

personally negotiated these sales, and he would often accompany
potential customers on test drives of the cars.

If a potential

customer ever expressed an interest in a classic car, testimony
established that personnel would direct the potential customer to
Mr. Taylor or the broker appointed to sell the classic cars after
Mr. Taylor’s death.
Even though, as respondent contends, the dealership did not
market the classic cars as it marketed the new and used cars, we
find the record replete with evidence that the dealership held
the classic cars as inventory for sale.

Mr. Taylor frequently

stated that every classic car was for sale.

In fact, the

dealership’s general manager testified that Mr. Taylor said

- 23 everything was for sale for the right price.

Testimony also

indicates that Mr. Taylor rejected a suggestion to form a
foundation to own the classic cars.

Mr. Taylor rejected the

suggestion when he learned that the profits from selling the
classic cars would go to the foundation rather than the
dealership.

Mr. Taylor wanted the profits to flow to the

dealership.

This factor favors petitioner.

7.

Time Devoted to Sales Activity

That a taxpayer devotes little time or effort to the selling
of assets may suggest that the assets are held for investment
purposes.

Williford v. Commissioner, T.C. Memo. 1992-450.

A

taxpayer does not hold property for sale if the taxpayer did not
initiate sales, advertise, have a sales office, or spend a great
deal of time on the transactions.

Byram v. United States, 705

F.2d 1418, 1424 (5th Cir. 1983); see also Ross v. Commissioner,
227 F.2d 265 (5th Cir. 1955) (taxpayer did not list property with
real estate dealers, advertise, or make efforts to sell the
property), revg. T.C. Memo. 1954-179.
We find that the dealership here devoted substantial time to
the sales activity.

This includes the time spent coordinating

advertising and promotional events, and the time Mr. Taylor spent
at classic car shows and auctions negotiating with potential
customers, as well as the time the broker spent negotiating sales
following Mr. Taylor’s death.

This factor favors petitioner.

- 24 C.

Conclusion
The ultimate inquiry in this case is whether the classic

cars were held primarily for sale.

We find that they were.

We

find compelling the dealership’s continuous and consistent
treatment of the classic cars as held for sale.

We also find

testimony concerning the dealership’s sales efforts credible and
persuasive.

From the date the dealership first acquired a

classic car, the dealership has been in the business of selling
cars.

The dealership’s classic cars were consistently treated

for book purposes and tax purposes as held for sale.

We surmise

respondent now objects because of the ordinary losses generated
by the sales in the years at issue.

Respondent was apparently

content to collect tax at ordinary income rates on gains from
sales of the dealership’s classic cars in prior years.
We have found that all of the pertinent factors favor
petitioner or were neutral.

The factors, however, are not

dispositive, and each case must rest upon its own facts.

The

focus here is upon the statute, which excludes from capital asset
treatment property held by the taxpayer primarily for sale to
customers in the ordinary course of his or her trade or business.
Sec. 1221(a)(1); see Thompson v. Commissioner, 322 F.2d 122, 127
(1963) (cited by United States v. Winthrop, 417 F.2d 905, 910
(5th Cir. 1969)), affg. in part and revg. in part 38 T.C. 153
(1962); Wood v. Commissioner, T.C. Memo. 2004-200.

- 25 Respondent had the burden to prove by a preponderance of the
evidence that the classic cars were not held for sale.
not meet that burden.

He did

We conclude that the dealership’s classic

cars were held for sale and hence qualify for an exception from
capital asset status under section 1221(a)(1).

Accordingly, we

do not sustain respondent’s determination.
Decision will be entered
for petitioner.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A29207b80f74635cd. Public record. Not legal advice.