Scrappy taxpayer off the hook for self-employment taxes.

• Author: Beavers, James A.
• Position: 2016 Tax Court memorandum decision in Ryther v. Commissioner

The Tax Court held that a taxpayer's proceeds from sales of scrap steel over a seven-year period were not self-employment income subject to the self-employment tax.

Background

Thomas Ryther was the sole owner, officer, and board member of Knight Steel (Knight), a corporation that fabricated steel frames, mostly for general contractors. Those contractors would bring large beams to Ryther, which he would cut to size and drill bolt holes in so that the contractors could easily assemble them into a frame at a construction site. Fabricating beams generated a considerable amount of scrap steel, which Ryther accumulated on a lot adjacent to his fabrication operation.

Knight's fortunes went downhill after the stock market collapsed in 2000, and in 2004 a Chapter 7 bankruptcy trustee took over the company to manage its liquidation. At that point, Knight's physical assets included the large pile of scrap steel that had built up from its operations and some superannuated equipment and trailers; however, the bankruptcy trustee, believing the scrap steel and the other assets were worthless, did not dispose of them in the liquidation and left them in Ryther's possession. Ryther made another go at steel fabrication using the equipment and trailers left from the Knight bankruptcy through a separate corporation called Mission Steel, but that venture was also unsuccessful.

With the failure of Mission Steel, Ryther needed money, but all he had was the scrap steel sitting on his property. Ryther was unaware throughout the Knight years that people would actually pay good money for scrap steel and had never attempted to sell any of it. However, in 2004, he finally came up with the idea of trying to sell the scrap. After doing some research, he discovered that scrap steel had not only value but also an active market.

Better yet, he found that wholesalers were willing to come to his lot, fill their trucks with scrap steel, and pay him cash for what they took. Over the next seven years, he sold scrap steel once or twice a month, to at least five scrap wholesalers, in sales that totaled over $317,000.

For the seven years he sold the scrap, Ryther dealt strictly in cash to avoid the IRS and did not file tax returns. Finally, in February 2012, he untimely filed all seven missing returns and reported his scrap sales as miscellaneous income. The IRS determined that the sales were a trade or business and his income from those sales was therefore subject to...