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further guidance, legislative history and she was not engaged in a real property ended up holding that Calvanico was not
principles of statutory construction apply trade or business under section a real estate professional because he held
to determine the meaning of ‘real property 469(c)(7)(C). no ownership interest, the court and the
brokerage’ for purposes of section 469.” The Tax Court reviewed Webster’s IRS did not dispute that the services of
In CCA 201504010, the issues were definition for the term “brokerage” as appraising real estate should be treated
whether a real estate agent is engaged in “the business of a broker” or “the fee or as real estate trade or business.
a real property brokerage trade or busi- commission for transacting business as In Stanley v. United States [W.D. Ark.
ness, and whether a mortgage broker is a broker.” The court outlined five activ- No. 5:14-cv-5236 (2015)], the taxpayer
engaged in a real property brokerage ities indicative of the business of a real owned and worked for a real estate man-
trade or business. The IRS ruled that a estate broker: agement company that managed his
real estate agent who brings together n Selling, exchanging, purchasing, rent- rental properties; he also served as gen-
buyers and sellers of real property may ing, or leasing real property eral counsel for the management com-
be engaged in a real property brokerage n Offering to do those activities pany. The IRS argued that the taxpayer
trade or business under section n Negotiating the terms of a real estate could not count the hours spent perform-
469(c)(7)(C), but that a mortgage broker contract ing services as general counsel toward
who is a broker of financial instruments n Listing of real property for sale, lease, the real estate professional test because
is not engaged in a real property broker- or exchange those hours were spent providing legal
age trade or business. The IRS reviewed n Procuring prospective sellers, pur- services, rather than providing services
the plain language of the term “broker- chasers, lessors, or lessees. related to the management of the com-
age” and stated that: The Tax Court elaborated that: pany’s real estate business. The court
Webster’s Dictionary defines “real Whether Mrs. Agarwal is characterized held that the taxpayer’s hours spent pro-
estate” as “property consisting of as a broker or a salesperson for state viding legal services counted toward sat-
buildings and land; the business of law purposes is irrelevant for federal isfying the real estate professional test
selling land and buildings,” and income tax purposes—the test is because “section 469 does not … require
defines “brokerage” as “the business whether she was engaged in ‘broker- that the service performed in a real prop-
of a broker” or the “broker's fee or age’ within the meaning of section 469 erty trade or business be of any specific
commission.” … Webster’s defines a … Consistent with her real estate sales- character or that all such services must
“broker” as “a person who helps other man’s license and pursuant to her con- be directly related to real estate. Rather,
people … to buy and sell property.” tract with the brokerage firm, Mrs. the services must simply be performed
… Accordingly, the common and Agarwal was engaged in ‘brokerage’; ‘in real property trades or businesses in
ordinary construction of “real property i.e., she sold, exchanged, leased, or rent- which the taxpayer materially partici-
brokerage” for purposes of section ed real property and solicited listings. pates.’” In AOA 2017-7, the IRS chal-
469(c)(7)(C) involves bringing togeth- Therefore, Mrs. Agarwal was engaged lenged the 5% ownership rule, but did
er buyers and sellers of real property. in a ‘brokerage’ trade or business within not challenge the determination of what
In Agarwal v. Comm’r (T.C. Summ. the meaning of §469(c)(7)(C). constitutes a real estate trade or business.
2009-29), the Tax Court held that a In Calvanico v. Comm’r (T.C. Summ.
California real estate agent who was not 2015-64), the IRS and the Tax Court Evaluate Client Activities
a licensed broker under state law was agreed that a licensed real estate apprais- A broad range of professional services
engaged in a real property trade or busi- er who worked for a public accounting that are provided in connection with the
ness because she was engaged in the firm may be engaged in a real property sale of real estate, including agents, bro-
same activity—bringing together buyers trade or business (“Respondent does not kers, appraisers, attorneys, accountants
and sellers of real property—as a fully dispute that petitioners’ rental real estate and more, should be treated as real estate
licensed broker. Agarwal argued that real activities constituted a trade or business trade or businesses for purposes of IRC
estate agents should be considered during the year in issue”). In 2010, section 163(j). Mortgage brokers, how-
engaged in a real property trade or busi- Calvanico worked full time as the direc- ever, are not exempt. CPAs should
ness; the IRS responded that she was a tor of real estate valuation and property advise their clients who provide such ser-
licensed real estate agent, but not a tax at Grant Thornton, and later served vices accordingly. q
licensed real estate broker. Thus, under as the director of national property tax
California law, according to the IRS, and real estate valuation at Crowe Yoram Keinan, JSD, LLM, is a
Agarwal could not be engaged in a bro- Horwath. He did not own an equity inter- partner at Kostelanetz & Fink LLP,
kerage trade or business, and therefore, est in either business. While the court New York, N.Y.
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