In Memoriam - Francis Allegra

In Memoriam Francis Allegra (1957-2015)

Francis Allegra (1957-2015) Many people here will remember Fran Allegra from the Tucson shows, and from his (free) legal advice to many of us over the years. I wanted to share a few personal memories about Fran: his role in this event; his collecting; and a few stories as we remember him as a fantastic speaker at the first inaugural year of this Symposium in 2011.

Fran was instrumental in creating what is now the DMCS, from the beginning. Gene Meieran pushed me to grow this event from the two evening talks we had at our gallery grand opening party in 2010 (at which he was the very first volunteer speaker, along with Astronaut and Senator Harrison Schmitt), into a formal Symposium.

Gene met Fran through me shortly beforehand and they became fast friends, especially with all of Gene’s travel to DC. As I recall, a coincidental lunch or dinner with Gene and Fran in DC or Dallas was the next discussion of that idea, and then Fran actively helped us work on the format and the planning so that the first year revolved around “Museums and Philanthropy,” as a common theme of the event. Never having hosted a Symposium, I admit now that we winged it for the first few years, based on advice from such friends.

Despite his busy schedule (at the time he was overseeing a famous legal battle between the government and an undercover FBI officer who wrote a tell-too-much book about his experiences inside the Hell’s Angels biker gang), he volunteered to support us and be a speaker.

His idea was to tie in minerals and museums, with the law: how does tax law work in the interplay of donations and philanthropy, for those of us who might donate items to museums? I was dubious. His sense of humor can be rather dry, and it was about law and lawyers... but he said to trust him. As a speaker in the first year, he surprised many who did not know him well. Who knew a lawyer could be so funny? I heard many people echo my thoughts in that first year, that his talk on Tax Law was the surprise comedy break we needed in a long day of testing this format, even amid other enjoyable talks. (For those who have not seen this talk, it is on Symposium DVD #1, from the Min Record in January 2011, and we have extra copies as well). His advice, and his ideas, are still completely relevant today and we encourage anybody interested to watch that talk.

At lunch after his talk in 2011, people kept coming up to him and saying things like “I didn’t know judges

had a sense of humor,” to which he replied to the effect of “I’m not so easy on the bench as I am with mineral people.” He used a specific piece from his own collection to illustrate in his talk what makes a good specimen (as opposed to a bad choice which invites trouble later) for high-multiple return on a tax donation, that could stand up to a later audit and inspection. The piece he used was a spectacular deep blue hemimorphite from Mexico, a superb piece that he had purchased at Tucson from a European dealer as a Smithsonite from the Kelly Mine (for a fair price, even as a smithsonite!). His point was that an argument could be made for a high-multiple valuation of such a piece for donation, based on him finding a “sleeper” and adding information and provenance that was unknown and which increased the importance of the specimen for some museum collections. In his talk, he suggested a conservative appraisal of this piece for donation value might legitimately be 3.5X to 5X on what he paid for it, based on documenting comparables and the difference between a mediocre USA smithsonite and a top-level Mexican hemimorphite. By the end of lunch, he had an offer of 6X from Sandor Fuss, who bought the piece for Bruce Oreck’s collection of Mexico minerals. It sold as the dessert was served. Fran, who intended only to make an academic point by using a nice example of something tangential to his own collection, converted that investment into a significant Colorado Smoky Quartz and Amazonite specimen (shown on the last page of this booklet).

As a friend, Fran was there for any of us with legal issues and questions about philanthropy, what could and could not be posted on the internet, and general advice for those of us dealing with international travel and customs issues.

I should probably mention at this point that he advised me when I got arrested by Interpol too, but that is another story for another time and place.

Dealers knew Fran as one of the luckiest collectors out there, from his emergence on the scene in Tucson in the late 1990s. With a family and a rising busy career as a young attorney working for the government, his mineral budget had to be refined to where he would discipline himself and purchase only 1-2 pieces at each show. He was so busy, that he would only be able to attend the Tucson show each year (most years). The lucky/funny thing was, that his mother-in-law met him there and participated in the decision process, and then supported him with a budget to encourage his hobby and enjoyment of the

break from his job and stresses. The first time they sat me down and explained to me this situation, I can say I was very impressed with her - I have never heard of another collector with such a supportive in-law! It was something fun that they shared together, and then he would go home and share with his wife and later his kids. At home, 1999, Fran kept his minerals in his office (Federal Appellate Court) at the Old Red Brick Courthouse across from the White House in DC. We used to joke that it was the most secure mineral collection in the country. I had many parcels stopped by security, at their scanner, and eventually the security people came to realize that Fran would just be the difficult one in the building. He had lovely wooden custom showcases with glass doors made as built-ins to his office (courtesy of us, the US taxpayers), and always worked form his desk facing the mineral collection, saying that it brought him calm and tranquility. (Looking to the right, one could gaze out the windows at the front door of the White House - a distraction, indeed!). Fran showed his collection to many people, including several Congressmen who collect, and he became close friends with Jeff Post at the Smithsonian and others involved in the mineral world in DC. Anybody passing through would make a pilgrimage to his office for lunch with a view (superb cafeteria food, or Thai takeout, his favorite). As you will read below, Fran drifted to focus on Russian minerals and the USA classics when he could afford them, wheeling and dealing his old pieces to work up, in the end doing business almost exclusively with Wayne Thompson and another two “young punk” dealers who were flexible in trading and helping a growing collector on a budget, as we all grew together from relatively unimportant obscurity in the hobby during the early 1990s: Daniel Trinchillo and myself.

In fact, Daniel gave him such a good deal on a Chinese specimen I wanted but could not afford in the 1990s, that I later had to 8X the price, to trade it out of Fran to add it to my own China collection (an Azurite from Anhui I still own today! Today, Fran’s core collection of USA and Russian classics remains with his family.

I will share one of Fran’s favorite stories, that few people could be told at the time. In 2005 or so, a tip from a fellow judge on the Appellate Court led Fran and I to sneak underground at the Bunker Hill Mine (seems safe to tell it now!) while it was the subject of a closure order from the EPA and as it was served by government attorneys.

So, Fran served on the DC Appellate Court of Appeals, the final place that cases against or prosecuted by the US Government go, after appealed from a lower District Court, and before they reach the Supreme Court if a decision could not be made by Fran’s colleagues. Fran’s

mineral collection was in his office, and all the judges had seen it (we tried and failed to get them to invest in minerals with him!). They knew about minerals, in any case. One day, another judge sitting at lunch next to him said to him that he had just gotten back from a case involving trying to close a Superfund toxic waste site, and had the most surprising experience of being walked through a room at the mine owner’s building that was “a rainbow of color with rocks just like you have in your office on all the walls.” Fran says he kept a poker face, excused himself to call me, then went back and got what info he could. We knew the case was being litigated in Idaho, and there are only so many Superfund waste sites in Idaho, and even fewer that the government was actively fighting with the mine owner to close down. I quickly found out that the room this judge must have seen would have to be the stash of Robert “Bob” Hopper, a far-right talk show host in rural Idaho that made Rush Limbaugh look fairly liberal at the time. He had bought the Bunker Hill lead Mine out of bankruptcy in the early 1980s, and was responsible for allowing the collecting in old tunnels dating to the 1800’ that turned up the incredible finds of Pyromorphite that came out in two waves from this old mine, in the mid 1980s and in 1995-1997. Hopper was mining the dumps of already mined material for zinc and other metals, and not bothering to mine the actual lead deposit. Too much work!

Wayne Sorenson (a well-placed mineral collector who owned the analytical lab down the road in Idaho) and Wayne Thompson (dealer and his friend) handled the sale of the pyromorphite at the time. I called Wayne Thompson to ask for an introduction to Bob, whom I had never met, and told him about the exciting news Fran had heard form a judge, about this secret stash!

Wayne promptly said something to the effect of “oh yeah, I always meant to go back for that stuff, and keep forgetting. I got all the good stuff and Bob is so difficult, that we never bothered.” Upon further clarification, what Wayne meant was that he bought all the things he thought were worth more than $10,000 by standards of 1997.... and then forgot about it for a decade. Well, needless to say, MANY pieces were worth more than that by 2005, and also Wayne had not even thought about trimming the big ones down to size and cleaning them. Fran and I decided that we might have a different take on what was worth getting, and so I called Bob with Wayne’s info to set up a visit. Luckily, Wayne is a gun-carrying cowboy and they had a good relationship, so I got in the door with that introduction - barely. The more Bob Hopper found out about me, the less he liked me (I had gone to school in California, and was too young to be serious in his mind).

I certainly did not mention that my “friend” I would bring with me was another judge on the same court that was trying the governments efforts to shut Hopper down.

And a Democrat, no less! Fran and I arranged to meet in Spokane (where we had dinner with Dave Waisman and Fran contributed to the founding ideas of his Texas Fine Mineral Show); and things were all set to drive out to the mine in Coeur d’Alene, Idaho, the next morning at 9 AM. While we were at dinner with Waisman, I got a call from Hopper something to the effect of : “the damned EPA **&*&-censored**&$ lawyers are coming tomorrow. I hate those &$&^$ ratbag scum lawyers. Come at 6 AM so we can go underground and avoid them.” Fran and I got up at 3 AM and drove out to meet Bob at the mine as ordered. He also told us to not bring any cameras and not tell any “damn lawyers.”

As I drove up to the mine, with us debating how to introduce him other than as a federal attorney and judge, Fran cringed a little at the signs which stated such homilies as “Just say no to the EPA!” and “This is my mine and my shotgun proves it,” that had been posted near the entry.

Bob met us in his office and hurried us into gear - knee high boots to keep out the toxic lead and arsenic filled red water that was flooding out of the mine, and hard hats. We went underground through a locked metal mine door and onto a small ore-mover with a mini-locomotive at the front. Fran and I sat in the car in silence while he drove, and chain-smoked, about 1 mile in the dark into the mountain. While driving, Hopper lectured us on how to be quiet and not talk to his employees, how to enjoy silence, and not to talk to any “damn lawyers” once we got out, because he was fighting the government to keep his mine open in the hopes that someday the largest easy lode of lead in the USA would make him rich beyond dreams - if he could legally mine it. We actually got to the old areas from the original lead and silver mining in the late 1800s (we saw signs to 1890), and used an old man-mover on a generator to go up a few levels, maybe 100 feet up into the mountain from grade level. He had a man there, who we were not allowed to talk to. Fran tried to make small talk but got chewed out for talking to the employee and told that “respect is the highest honor,” and to respect his wish to stop talking. We stopped talking.

Did I mention he was carrying a firearm?

That worker then climbed up the way we had ridden, and we all sat and watched them amiably chain-smoke while they pumped what I was told was pure oxygen from a tank up a 100-foot hole into the one part of the mine where the pyromorphites had been found (the Jersey Vein). The air was bad up there, and nobody had been up in a long time,

so they had to pump some air up. The ladder was about 200 steps nearly straight up through a 4 foot vertical tunnel, from our level to the Jersey Vein. It was at that point that Fran looked at me and calmly announced he was quite comfortable to stay down and “not talk” to the worker but would take a photo of my climbing up to my death. Bob had me lead, and I went up the ladder.

Waiting for him, I sat and contemplated Fran’s choice of words. Bob came up and had a 5 minute smoking break in the pure oxygen, to recover from the climb. I worried it would explode us. Then, we took a walk and saw empty pockets all along the vein for maybe 100 meters, culminating in a huge and unreachable ceiling covered with bright orange arsenian pyromorphite that looked like a sunset in our headlight beams. The pockets were cleaned out and rimmed with cigarette butts encrusted in lime and mine goo, so that the butts made a rim around the bottom of each pocket. While we were up there, Fran “not talked” to the worker anyhow, and got a good picture of the goings on at the mine and the number of specimens that had been stashed. On our exit from the mine at noon, Bob was surprised to find the federal attorneys waiting for him, as he thought they would have gone away since he missed their 9 AM meeting. Sure enough, two huge black Escalades were waiting, with Salt Lake City plates.

Those lawyers were not going away. So, Bob lined Fran and I up, and took turns rubbing his hands against our legs and chests to get all the gooey, red, lead-stained mud off of our clothes and put it on his overalls, unbuttoned his shirt to let the sweaty smell out, and smeared some mud on his chest for good measure. He then told us to wait in the collection room while he met the attorneys for “a short while,” and directed us to the treasure room we had been waiting for!

Through the window, we watched him slime his hands on his boots for good measure, and then walk up to them and greet them with a firm muddy handshake.

As we turned around, sort of in shock after spending 5 hours underground with this chain-smoking guy and being out of breath and having no water or food, we saw a massive mutt of a dog looking up calmly at us from his bed n the floor on the far side of the approximately 12 x 15 foot room, lined with mineral cases and filled with all colors of pyromorphite. The dog was a guard dog. It was not happy to see us in its space. Fran went to the water cooler, across the room, and it leaped up and growled. What became clear was that we could not cross a line about 5 feet into the room, without the dog making scary faces and noises at us. So, we looked at the closer minerals, leaned over to see others as we could, and waited. Two hours. Finally, Bob was done with his

meeting and he came to get us, excused the dog, and we could see the whole room freely. Long story short, we bought some rocks that day, including at least two dozen pieces worth 10k and over, hundreds worth $500-5000 that Wayne had simply not wanted to handle nearly 10 years prior, and the biggest single specimen Bob had ever recovered intact - a monster yellow piece with no repairs from the mid-1980s that was near 2 feet across!

Fran’s commission on the tipoff was a number of smaller pieces he traded off and a magnificent, 3-dimensional orange pyromorphite cabinet piece from the mid-1990s finds, that remains in the collection. Bob was in such a good mood after insulting the lawyers for two hours and preparing for his afternoon radio show to talk about it to his listeners that we got a splendid deal and were able to buy much of what I wanted, though it was far too much to take all at once (the rest was later wholesaled out, before Bob passed away). Fran and I went home dirty but happy, having to drive all the way back to Spokane to get a hotel and a shower after our long day. I think we were both so tired that we got on the plane the next morning in relief, and he took his prize home with him.

EPILOGUE Fran was a strong supporter of this symposium, and he attended 3 of the years during 2011-2014. For 2015, he planned to bring his son Domenic for the first time and also was scheduled as a speaker on a sequel to his 2011 talk on how collectors and museums could work more together through philanthropic donation. Just before his cancer came back, we had scheduled him as a speaker.

He was actively considering how to retire from being a judge at age 65 if he did not go on to the Supreme Court under a Democratic president. He taught law at George Washington school of Law for mineral money on the side, and he was thinking to continue to do that while starting a niche business in law advisory related to mineral donations, customs, and estate tax law. As well, Fran talked about being more active with the Mineralogical Record and was starting to write regular columns with Wendell Wilson under the title “Legal Nuggets,” which are all still as relevant now as ever.

A recent note from his son Domenic, now heading to college, shows what an impact he made in involving his oldest son, in particular, in his hobby. “I always wanted to go to the symposium with my father, but he passed away the last day of the 2015 symposium. Thankfully I was able to go to the 2015 Tucson show with him, something that I always dreamed of doing since my youth. I consistently watch my father’s talk on the DVD from the 2011 symposium; it is always great to hear his

voice and his “ dad” jokes. After he passed, staying connected with the mineral world has been difficult. I haven’t had the opportunity to attend any shows, but that hasn’t stopped me from keeping in touch with all of his friends. As I head to college in the fall, even though I will not be majoring in geology, I will be studying political science and will hopefully be attending law school to follow in his footsteps.”

I would be remiss without mentioning here that Fran’s other most important activity besides his love of the law and legal matters, and his mineral collecting, was to spend time with his family and kids. He became a gung ho Cub Scout leader, going all out for Denmaster Dad at a time when I was struggling with the responsibility of being only an assistant den leader. Despite his incredibly busy schedule, he pursued the most active involvement possible for a father, and attended nearly all pack meetings and many camp outs. He was an avid counselor for kids as they advanced through Scouts, and toured them to the Courthouse and the Supreme Court on a regular basis.

He stayed with his boys through Boy Scouts, and spent hundreds if not thousands of hours supporting their Troop and many other Scouting events on a regional level in Washington DC. Fran was a dedicated Scout father, often changing into Scout gear at the courthouse and going straight to meetings, and then finishing his work late into the nights and early in mornings.

-Dr, Robert Lavinsky August, 2017

I had the great honor to work with Fran’s family to write his bio-sketch for the Mineralogical Record collector archives, in time for him to see it posted online a few months before he passed away.

It follows below, with edits courtesy of Wendell Wilson and reprinted with the permission of the Mineralogical Record.

Fran Allegra (1957-2015) Francis Marion Allegra, mineral collector, author and jurist, was born in Cleveland, Ohio, on October 14, 1957, the son of Mary and Frank Allegra. Fran first became interested in minerals around the age of eight. He had a Mattel rock-polishing kit which he used feverishly, and his father would drive him out to North Olmsted (15 miles or so) to a small mineral shop where he acquired his first specimens. He also bought specimens from Lee Lapidary on the west side and Fred Harvey’s shop in Terminal Tower. He soon became a regular visitor to the Cleveland Museum of Natural History, studying the minerals on display.

He received his Doctor of Law (magna cum laude) from Cleveland-Marshall Law School at Cleveland State University in 1981. Following graduation, he served as a law clerk to Chief Trial Judge Philip R. Miller of the U.S. Court of Claims from 1981 to 1982.

For the next two years he worked as an associate at the Cleveland law firm of Squire, Sanders and Dempsey, where he specialized in tax and bond work. In 1984, he joined the Appellate Section of the Tax Division of the U.S. Department of Justice, and for the next ten years he was an appellate litigator, handling many of the Tax Division’s most complex cases in Federal courts of appeals throughout the country.

During this period he steadily rose through the Tax Division’s ranks, becoming first a Special Assistant to the Assistant Attorney General of the Tax Division and then Counselor to the Assistant Attorney General of the Tax Division.

In 1994, Fran was appointed Counselor to the Associate Attorney General (the third-highest-ranking official at the Justice Department). Shortly thereafter, he was appointed Deputy Associate Attorney General. In the latter role, he worked with the Tax and Antitrust Divisions, as well as with the National Economic and Domestic Policy Councils at the White House.

On October 22, 1998, at the age of forty-one, Fran Allegra was appointed by President Bill Clinton to be a judge on the United States Court of Federal Claims. Over his judicial career, he issued more than 250 published opinions, on topics ranging from tax issues to government contracts, intellectual property, takings, and military and civilian employment. From 2003 through 2010, Judge Allegra was a member of the Information Technology Committee of the Judicial Conference of the United States.

Judge Allegra was an adjunct professor at the Georgetown University Law Center, where he taught Litigation with the Federal Government and a seminar on sovereign immunity. In 2012, Georgetown awarded him the Charles Fahy Distinguished Adjunct Professor Award, which is given annually to an adjunct professor who has made an extraordinary contribution to the Law Center. Judge Allegra was also a frequent lecturer at the Federal Judicial Center programs and at other programs involving intellectual property, taxes, government contracts and the use of technology in judging. He is considered an expert

on issues involving electronic discovery. In the Fall of 2013, Judge Allegra co-authored (with Daniel B. Garrie) Plugged in: Guidebook to Software and the Law. Fran loved all minerals, but quickly realized that it was impractical to pursue every species. So, in the mid-1990s, he decided to specialize in the minerals of Dalnegorsk, Russia as his core suite (several dozen specimens). He also added occasional USA classics (amazonite from Colorado, rhodochrosite from the Sweet Home mine, pyromorphite from the Bunker Hill mine, etc.). One of his prize specimens was a clear fluorite from Dalnegorsk that he spent a week negotiating for at the old Executive Inn Show in 1998 or thereabouts -- It remains in his collection today. He enjoyed visiting and going deep underground at the Bunker Hill mine with Bob Hopper (the mine owner) a few years ago, and came away with a beautiful

pyromorphite which he purchased in Bob’s office.

Fran’s mineral collection today consists mostly of well-chosen cabinet specimens of display quality.

Fran wrote a column—”Legal Nuggets”—for the Mineralogical Record, in which he brought his long experience to bear on legal matters involving minerals, mineral collecting and mineral dealing. Fran became the go-to guy for legal advice in the field of minerals as collectibles, and he gave an authoritative talk on the subject at the first Dallas Mineral Collectors Symposium.

Fran married Regina Esposito in 1996 and has two children, Domenic 16, and Vincent 14. The boys have followed Fran’s love of minerals and have a small collection of their own.

Fran passed away on August 27, 2015

WILSON, Wendell E. (2017) Mineralogical Record Biographical Archive, at www.mineralogicalrecord.com.

Collectors, Investors and Dealers (Oh, My) During a trip to Berlin in 1891, Mark Twain was mistaken several times for Theodor Mommsen, the eminent German historian and archeologist. Reputedly, Twain became embarrassed, when, as he entered a beer hall, the assembly jumped to their feet and pounded their mugs in a toast, only later to find that he was not Mommsen, the true object of their affection. This caused Twain to comment in his diary – “been taken for Mommsen twice. We have the same hair, but on examination it was found the brains were different.”

Sometimes, we mineral afficionados are prone to misidentifications, particularly when it comes to identifying ourselves as a collector, an investor or a dealer. In these times of expensive rocks, there is, perhaps, more tendency than every to blur those categories. Some collectors fancy themselves as dealers, at least if it means getting into the wholesale ballrooms at Tucson. Yet, other folks who regularly sell minerals, sometimes even at shows, shrink from the notion of being called dealers. And everyone would like to be an investor – at least if that means buying low and selling high. But, lurking behind these seemingly innocent labels are tax ramifications – and, for the unwary, potentially adverse ones.

The income tax law distinguishes between collectors, investors and dealers, in a variety of ways. A key provision is section 183 of the Internal Revenue Code, enacted by Congress in 1969 to deal with so-called “hobby losses” – primarily, but not exclusively, those incurred by “weekend” farmers and horse breeders. This provision substantially limits most deductions relating to “an activity not engaged in for profit” – that is, an activity relating neither to an investment nor a trade or business. Owing to this “hobby loss” section, mineral collectors may deduct their expenses or losses only up to the amount of gross income derived from the collection activities and, even then, subject to other significant limitations in the Code (e.g., to be deductible, miscellaneous deductions must exceed two percent of the taxpayer’s adjusted gross income). As a result, the wide majority of collectors can neither deduct the cost of creating or maintaining their collection, nor claim any losses associated with the sale of their minerals. The Code, however, offers collectors one financial ray of hope – they may receive favorable capital gains treatment on the income produced from the sale of their minerals, provided the minerals have been held for a minimum qualifying period.

Unlike collectors, investors may deduct certain costs as expenses incurred in the production of income – and may do so even if those expenses exceed their income from selling minerals. Like collectors, investors also receive favorable capital gains treatment on income produced from the sale of minerals held for investment. Moreover, the favorable tax treatment afforded to “like-kind” exchanges – in which taxpayers can swap one specimen for another, potentially tax-free – applies to investors, but not collectors.

Dealers too may benefit from this like-kind exchange provision. They may also deduct their expenses as a trade or business expenses. But, unlike collectors and investors, they are precluded from receiving capital gains treatment. Dealers, however, enjoy one potentially significant tax advantage unavailable to the other groups – they can not only deduct losses, but may carry net operating losses back and forward to offset income in other years. (Of course, most of them would prefer not having more losses than they can deduct in a single year!)

Originally Published in the Mineralogical Record as part of Francis Allegra’s Legal Nuggets Series.

There are, then, potential advantages and disadvantages to each tax status. Having weighed these pros and cons, many commentators believe that investors receive the most favorable tax treatment – deductible expenses, like-kind exchanges and capital gains treatment. Be that as it may, good tax planning may allow you to maximize your tax savings, while bad tax planning can leave you in a lurch. Indeed, no tax planning might leave you with the worst of two worlds – for example, failing to take deductions to which you are fully entitled in earlier years, only to find in later years, after those deductions can no longer be taken, that the IRS has saddled you with the loss of capital gains treatment.

So, how do we tell the difference between a collector, an investor and a dealer? In its usual helpful way, the tax law answers this question with – two more questions.

The first is – whether the activity is engaged in for profit? The IRS often resolves this issue by relying on a list of factors, many taken from opinions in cases involving art owners. These factors include: (1) the manner in which the taxpayer carries on the activity – with the taxpayer more likely to have a profit motive if he uses financial projections, has accounting records, or a budgets to control expenses; (2) the expertise of the taxpayer or his advisors – with taxpayers pursuing a profit likely to develop more expertise; (3) the time and effort expended by the taxpayer in carrying on the activity – with spending a great deal of time and effort a sign of a profit motive; (4) the expectation that assets used in the activity may appreciate in value – with that expectation really being at the core of a profit motive; (5) the taxpayer’s history of income or losses with respect to the activity or similar activities – with long-term profitability being indicative of an intent to realize a profit; (6) the overall financial status of the taxpayer – with the existence of other large sources of income tending to suggest that the taxpayer is pursuing a hobby; and (7) whether the activity has elements of personal pleasure or recreation – with more pleasure meaning less profit motive.1 Now, before the last of these factors causes you to shudder, take heart, for the relevant IRS regulation hastens to add that: “[T]he fact that the taxpayer derives personal pleasure from engaging in the activity is not sufficient to cause the activity to be classified as not engaged in for profit if the activity is in fact engaged in for profit as evidenced by other factors whether or not listed.” Note too that section 183(d) of the Code creates a presumption that an activity is engaged in for profit if income, in the form of a net profit, is realized from that activity over a certain number of years – these rules, however, are a bit complicated and beyond the scope of this brief column.

If the taxpayer lacks a profit motive, our inquiry is at an end – he is a collector, subject to the limitations of section 183 described above. But, if that individual passes the profit motive test, we reach the second of our queries – is he or she engaged in a trade or business? Here, we encounter yet another facts-and-circumstances test, distilled from decades of court decisions (many involving whether gambling is a trade or business). Among the factors relevant here are:

1

See Treas. Reg. § 1.183-2(b).

-2Originally Published in the Mineralogical Record as part of Francis Allegra’s Legal Nuggets Series.

(1) whether the taxpayer is involved in the profit producing activity with continuity and regularity; (2) whether the taxpayer conducts frequent or substantial sales; (3) whether the taxpayer holds himself out to others as engaged in the selling of good and services; (4) whether profit is expected to be produced not from the long-term appreciation of the asset, but from buying the item at a lower than retail market price and selling it at a market price; and (5) whether the taxpayer maintains books and records that are consistent with conducting a business (e.g., ones that reflect the carrying of an inventory). If the answer to all these questions is “yes,” the taxpayer is likely in a trade or business. Yet, in practice, the standard for determining trade or business status is more like that once famously penned by Justice Potter Stewart in describing obscenity – “I know it when I see it.” If it looks like a trade or business, in other words, it probably is.

If we apply the profit motive and trade or business tests, in tandem, we get the following general results: "

if you lack a profit motive, you are a collector

"

if you have a profit motive, but are not in a trade or business, you are an investor

"

if you have a profit motive and are in a trade or business, you are a dealer.

Sound simple? Let’s put these twin tests to work on a hypothetical.

Assume that Mr. Primorsky Nikolai occasionally travels to Europe to buy large Dalnegorsk collections. He retains the best specimens for himself, and then resells the rest, in a lot, to a friendly dealer. Sometimes, he makes a profit on these deals, but his financial goal is to come out even, that is, to sell the collection (minus the culled specimens) for about the price he bought it.

Mr. Nikolai does not hold himself out as a mineral dealer. He sometimes runs ads that read – “Collector buys very fine Dalnegorsk collections. Top prices paid.” He has no current intentions of selling his world-class Dalnegorsk collection. Indeed, while he periodically buys individual specimens directly from dealers, he rarely sells any of his own, even though most of them have greatly appreciated in value.

So what is Mr. Nikolai? A collector? An investor? Perhaps a dealer? Applying the factors above, we can surmise that he is most likely a collector. He appears to be motivated primarily by personal pleasure and does not appear to have a dominant profit motive – at least one reflected in his dealings. Because he does not have a profit motive, we need not look at the second test posed above – whether he is in a trade or business. But, looking at all the factors listed above, you can see how his tax status might be different if we modified the hypothetical a bit. What if, for example, Mr. Nikolai plans to sell his collection to fund his retirement, and has made financial and budget projections on that basis, seeking advice periodically from experts on the value of Dalnegorsk minerals? What if he keeps a detailed inventory of his collection and, to track the appreciation of his specimens, logs the results of comparable sales or auctions on the internet?

What if he has no other significant source of income and, every few months, sells off several

-3Originally Published in the Mineralogical Record as part of Francis Allegra’s Legal Nuggets Series.

duplicate specimens that have particularly appreciated to realize some spending money? With a few tweaks of our hypothetical, then, we can improve the case for classifying Mr. Nikolai as an investor.

The astute among you (more likely, the self-interested) are probably asking by now – can a single taxpayer be a collector as to some minerals and an investor or dealer as to others? The answer is a resounding – maybe. The limitation in section 183 applies to “an” activity. In defining the quoted phrase, the IRS regulations2 state that “where the taxpayer is engaged in several undertakings, each of these may be a separate activity, or several undertakings may constitute one activity.” They further advise that “[g]enerally, the most significant facts and circumstances in making this determination are the degree of organizational and economic interrelationship of various undertakings, the business purpose which is (or might be) served by carrying on the various undertakings separately or together in a trade or business or in an investment setting, and the similarity of various undertakings.” Finally, the regulations make clear that while the Commissioner generally accepts a taxpayer’s characterization of several undertakings as being a single activity or separate activities, that characterization will be rejected if it is “artificial” and “cannot be reasonably supported under the facts and circumstances of the case.” The cases in this area – many of which involve farmers that held some land for cultivation and other for investment – suggest that, at a minimum, if you are going to hold some specimens for investment and others in a collection or inventory, your recordkeeping should plainly reflect that difference. And those differences should also be reflected on your tax returns, which should report income and deductions, from year to year, that are consistent with your dual tax status.

Yes, there are limits to tax planning – many of the basic facts that reflect who we are and what we do cannot easily be altered. Nonetheless, the moral of the story is that you should be aware of your tax status (or desired tax status) and plan and act accordingly, particularly, in avoiding activities that might cloud your status and, especially, in maintaining appropriate books and records. So, if you are an investor or collector, you might want to consider whether getting a full-fledged business license (and a card to match) really are worth increasing the odds that the IRS will treat you as a dealer. Better yet, if you are going to expend significant dollars on mineral specimens or have accumulated a collection that has become quite valuable, take some time to sit down with a tax professional and develop a long-term plan. Depending on your age, that plan might be dominated by estate tax considerations. Having that plan is going to be particularly critical if you want to convince the IRS (or, heaven forbid, a judge) that you are holding some specimens in a collection and others to produce income.

So, next time someone at Tucson starts a friendly conversation by asking you whether you are a collector or dealer, think twice (and maybe ask for credentials!). Better yet, if you are serious about your minerals, take a few moments before you go to your next show to do a little tax planning. If you don’t, you might some day encounter the IRS revenue agent who once said – “The trick is to stop thinking of it as ‘your’ money.” @ Francis M. Allegra

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Treas. Reg. § 1.183-1(d)(1)

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Originally Published in the Mineralogical Record as part of Francis Allegra’s Legal Nuggets Series.

2011 Dallas Mineral Collecting Symposium Tax Implications of Donation and Philanthropy Francis M. Allegra

In 2011, Francis Allegra spoke at the Dallas Mineral Collecting Symposium regarding the tax implications of donation and philanthropy as it pertains to minerals and museums.

Judge Francis M. Allegra sat on the United States Court of Federal Claims, a federal trial court that handles a wide range of monetary cases filed against the Federal government. Appointed by President Clinton and confirmed by the Senate in 1998, Judge Allegra formerly worked for more than fourteen years at the U.S. Department of Justice in a variety of positions in the Tax Division and the Office of the Associate Attorney General. While at Justice, in 1995, he was appointed Deputy Associate Attorney General, in which role he was the senior management liaison for the Tax and Antitrust Divisions, where he was Counselor to the Assistant Attorney General and an appellate litigator. He also served with the National Economic and Domestic Policy Councils at the White House.

Judge Allegra was a member of the Information Technology Committee of the United States Judicial Conference and served on several Judicial Conference working groups. He also was a lecturer at the Federal Judicial Center, particularly on topics involving electronic discovery and the use of technology in judging. Judge Allegra was also an adjunct professor of law at the Georgetown University Law Center and contributed articles for the Mineralogical Record.