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TAX CLINIC

it for sale. Therefore, the extent of put a substantial amount of time and ef- struggle with the longer-term effect
improvements made to the property fort into marketing the lots. of telecommuting employees who
after the LLC took possession of it Overwhelmingly, then, the eight fac- no longer physically worked within
was negligible. tors weighed against Musselwhite’s posi- their jurisdictions.
Factor 4. The frequency, number, tion that he should be able to take an The question became whether states
and continuity of sales: As outlined ordinary loss. The Tax Court upheld the may legally tax the income of nonresi-
above, the LLC never reported any gross IRS’s determination that his $1,022,726 dents who begin telecommuting on
sales or receipts. When there were sales loss from the sale of the four lots was a a long-term basis, as the COVID-19
of property, the LLC reported them on capital loss. pandemic and telework continued. Fur-
Schedule D. Since the focus here was on From Jennifer Wesselman, CPA, and ther state guidance in the form of vari-
the taxpayer’s activity, the only evidence Leah Anderson, CPA, Aldrich CPAs + ous filing relief measures for employees
the court had was of investment. The Advisors, Lake Oswego, Ore. working from home followed in June
lack of reported sales elsewhere indi- and December 2021. By August 2022,
cated this was an isolated transaction. however, most of these filing protec-
The court held that factor 4 weighed State & Local Taxes tions had expired.
against the taxpayer because of a lack Complications continue to arise,
of frequency, number, and continuity Continued challenges with each state making its own tax
of sales. involving teleworking rules. In most states, a nonresident
Factor 5. The extent and sub- employees: The new normal employee’s income is sourced based
stantiality of the transaction: The Teleworking is not new, but the on the employee’s physical presence or
taxpayer’s sale of the four lots was the COVID-19 pandemic brought with it location. Yet some states have adopted a
only sale associated with this transaction. a spike in remote work arrangements. “convenience rule,” which turns on the
The record before the court was silent From January 2020 to September reason an employee is working out of
as to any continued involvement by him 2021, the average share of postings state. If the employer requires the em-
in lot development after he sold them. on job websites mentioning remote ployee to live out of state for purposes
The court viewed the change in the bal- work nearly tripled. While initially of work (at the employer’s convenience),
ance sheet’s classification to inventory in associated with the introduction of then the employer must withhold taxes
2011 as the taxpayer’s “purported ‘ticket’ pandemic-related work and travel for the state where the employee works.
to getting a significant ordinary loss restrictions, the average share of remote On the other hand, if an employee
through a quick sale of the lots.” The job postings has remained near the peak chooses to live in another state for his
court held that factor 5 weighed against it first reached in April 2021. States or her own personal reasons, then an
the taxpayer. and localities initially issued guidance employer must withhold taxes for both
Factor 6. The nature and extent generally providing for a status quo the state of the employer and the state
of the taxpayer’s business: Mus- method of taxation for nonresident where the employee is a resident; i.e.,
selwhite’s everyday business was not the employees working traditionally in where the employee performs the work.
development and sale of real estate, as he their states. But many states began to States with a convenience rule include
was a personal injury attorney, receiving
taxable income in excess of $700,000
for each of the years from 2011 to 2013.
The wages or allocable income he re-
ceived indicated that his activities as an
attorney were full-time endeavors. The
court held that factor 6 weighed against
the taxpayer.
Factors 7 and 8. Extent of adver-
tising and sale of property through PHOTO BY SDI PRODUCTIONS/GETTY IMAGES
the use of a broker: These were the
only factors that favored the taxpayer.
He hired a broker immediately upon
distribution of the assets from the LLC.
The broker indicated in a letter that she

18 December 2022 The Tax Adviser