Wednesday, October 5, 2016

Sale of Scrap Metal Not SE Income

Mr. Ryther had a corporation in the steel manufacturing business.  The scrap metal accumulated on a neighboring lot appearing to have no value.

The corporation filed bankruptcy and dissolved.  The bankruptcy trustee ignored and abandoned the large pile of scrap steel deeming it to be worthless.

Mr. Ryther took over the corporation’s land leases as well as the scrap steel with hopes of starting a new business.  The new business had very little income.  Having bills to pay Mr. Ryther looked into trying to sell the scrap steel and found wholesalers were willing to pay him for it.  He sold scrap for cash when he had financial need.  Over the next seven years he collected over $300,000 in cash from the scrap sales.

Although he was late, he eventually filed tax returns showing the income on his Form 1040, line 21 as Other Income.  IRS assessed SE taxes claiming Mr. Ryther was in the business of selling scrap.  Tax Court had to determine if this was indeed a business subject to SE taxes.

The Court looked at many factors including:

1) How Mr. Ryther obtained the scrap.  If he obtained it by picking up scrap through his sole proprietorship, the sales would likely be SE income.  In this case Mr. Ryther obtained the scrap from another party (i.e., a bankrupt corporation) when it terminated.  Mr. Ryther did not acquire the scrap with the intention of selling it, but merely because it was on the land covered by the land lease that he assumed.

2) Whether the scrap could be considered inventory.  There were no additional purchases noted in the case.  Mr. Ryther did not do anything with the scrap other than sell it.

3) The frequency of his sales.  Mr. Ryther sold scrap 24 times during the year in question.  The Court determined this was sporadic and not regular.

4) The amount of effort spent in the activity.  Mr. Ryther’s efforts mainly consisted of contacting wholesalers letting them know he was ready to sell some.

5) Although the sales of $300,000 over seven years   represented 100% of Mr. Ryther’s income, these sales resulted from capital appreciation rather than his personal efforts.

After examining all the issues, the Court ruled in favor of Mr. Ryther.

Editors note:  If he had been picking up scrap from other businesses’ garbage heaps, SE may be applicable.  However, in this instance it appears that Ryther had acquired an asset, the sale of which might better have appeared on Form 8949 (Schedule D).  It could be that reporting the income on the miscellaneous income line (Form 1040, line 21) caused the IRS to question SE.

Thomas L Ryther, TC Memo 2016-56

This case can be found by going to, clicking on the Opinion Search tab and entering RYTHER in the Case Name box.

This text has been shared with you courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (920-496-9111).

©2016 Ashwaubenon Tax Professionals.  No reproduction of this article is permitted without the express written consent of Ashwaubenon Tax Professionals, 2140 Holmgren Way, Suite 1040, Green Bay, WI  54304.

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