Khalaf v. Department of Revenue

Under Rev. Rul. 75-538, 1975-2 C.B. 34 (1975), “[a] taxpayer engaged in the trade or business of selling motor vehicles is presumed to hold all such vehicles primarily for sale to customers in the ordinary course of the taxpayer’s trade or business.” Under Estate of Reynolds v. Commissioner, 55 TC 172 (1970), “Transactions within a family group are * * * presume[ed] * * * gift[s].”

Khalaf (Taxpayer) appealed a Tax Court judgment, ruling he could not deduct payments to his sisters as business travel expenses and depreciation of a dune buggy held in inventory. On appeal, Taxpayer argued the dune buggy was a “prototype and demonstration unit” and not inventory, and that the payments to his sisters were legitimate business expenses for a vehicle rental and apartment in Dubai. In response, the Department of Revenue argued that demonstration models are non-depreciable inventory and that Taxpayer failed to show that the payments to his sisters were not gifts. Under Rev. Rul. 75-538, 1975-2 C.B. 34 (1975), “[a] taxpayer engaged in the trade or business of selling motor vehicles is presumed to hold all such vehicles primarily for sale to customers in the ordinary course of the taxpayer’s trade or business.” Under Estate of Reynolds v. Commissioner, 55 TC 172 (1970), “Transactions within a family group are * * * presume[ed] * * * gift[s].” The Court found that Taxpayer, bearing the burden of proof, did not rebut either presumption with substantial evidence. Affirmed.