                          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.     Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).     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.       Sec. 7491(a)(2)(A) and

(B).     The taxpayer has the burden of establishing that each

requirement of section 7491(a)(2) has been met.       Higbee v.

Commissioner, 116 T.C. 438 (2001).       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.     We

find this evidence credible as to the factual issue in dispute

and thus sufficient to shift the burden to respondent under
                              - 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.   See

Williford v. Commissioner, T.C. Memo. 1992-450.13   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.   The eight

factors are:   (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   Williford v. Commissioner, supra; see also Bramblett v.


     14
      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.   This factor favors petitioner.

     3.   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 value-

added 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.   This factor favors petitioner.

     4.   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.    A dealership could have numerous physical

locations.    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.     We therefore find this factor neutral.

     5.     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
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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.
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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.   He did

not meet that burden.   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.
