Recent Court Cases Regarding Hobbies and/or Businesses
| AMWAY LOSER: The Tax court ruled that an Amway distributorship
was not a trade or business. The court noted the taxpayer (1)
had incurred expenses with no realistic plan for how they may
recoup those expenses; (2) recruited only family, friends and
acquaintances to be the downline distributors; (3) failed to
change tactics to increase the likelihood of earning a profit,
despite four years of losses; (4) had no prior business experience;
and (5) the husband continued his full-time job as an engineer.
(Jorge Lopez, T.C. Memo. 2003-142. This follows several other
similar rulings in Poast. T.C. Memo. 1994-399, Thiesen, T.C.
Memo. 1997-539, Ogden, T.C. Memo. 1999-397, Nissley vx Commissioner,
T.C. Memo 2000-178) |
| AMWAY WINNER: Not all taxpayers lose! After
original IRS position that taxpayer did not have profit motive,
taxpayer prevailed. (Brennan, T.C. Memo 1997-60) |
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| HORSE BREEDING WINNER: Farming, ranching,
thoroughbred breeding (including polo ponies), and big-game
hunting activities were all for-profit. Tax Court looked
at taxpayer's expertise, accurate books, advertising by entering
horses in polo tournaments and the work performed by the
taxpayer (...and including shoveling horse manure) were determining
factors. (Johnston III, T.C. Memo 1997-475) |
| HORSE BREEDING LOSER: Taxpayer was a full
time professor at New Mexico Highlands University School
of Social Work. He had grown up on a farm and as a child
owned a horse that he used to ride to school (up hill both
ways!). He attempted to breed Appaloosa horses without any
significant formal training in breeding. He bred a single
stallion to one or two mares per year which could not have
possibly produced a profit. The court wrote "Petitioners
academic success does show that they are highly intelligent
people who were fully capable of doing the simple arithmetic
necessary to realize that the horse breeding operation was
not, and as operated, could not be profitable." The Court
disallowed all losses from the breeding activity. (T.C. Summary
Opinion 2002-58) |
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| FISHING WINNER: taxpayers began hosting
bass tournaments. They recruited participants through fliers,
speaking engagements and other promotions. Taxpayers pursued
the activity to augment their retirement income. Through
study, they became experts in bass fishing. Tax Court held
for the taxpayer. (Busbee, T.C. Memo 2000-182) |
| FISHING LOSER: Taxpayer,
a retired car dealer, began billfish tournament fishing for
pleasure. The taxpayer and his wife participated in tournaments
held in exotic resort like locations. The taxpayer's pursuit
of competitive excellence (from their yacht) was not motivated
primarily by the pursuit of profit. Taxpayers were millionaires
who recently sold the company business. Tax Court held for
the IRS. (Peacock, T.C. Memo 2002-122) |
|
| WRITING WINNER WHILE
LOSING: Taxpayer was not allowed to deduct some
of his "research expenses" relating to his writing activities.
He paid to have his book published, which it was. However
he had a loss from his writing business. The Tax Court,
and the Fourth Circuit, ruled against the IRS in determining
that he did in fact have a profit motive. In spite of the
recreational aspect of his writing, the court concluded
"these factors were outweighed by the business-like manner
of his recordkeeping, the diligence of his marketing, and
the start-up nature of his losses." Unfortunately, his
largest deductions were disallowed because they were "so
personal in nature as to preclude their deductibility."
He wrote about prostitution. (Vitale, T.C. Memo 1999-131) |
| WRITING LOSER: Taxpayer
was a computer programmer who dabbled in writing. He founded
a consumer newsletter with 43 subscribers paying $9 each.
He took an 8-week writing about the Civil War. Taxpayer received
no income from his Civil War writing. He has no professional
training as a writer and no expertise regarding the Civil
War. He did not obtain a literary agent or make any advance
arrangements to profit from the trip. The Court concluded
that the trip was really a vacation and disallowed all expenses
related to writing. (T.C. Summary Opinion 2002-39) |
|
| REAL ESTATE LOSER: Real
estate business ruled a hobby. Taxpayer had a real estate
business for several years, never made a sale, and then became
an engineer. He continued with the business, deducting losses,
but still made no sales. Taxpayer did not keep records, have
a business phone or do any advertising. Receipts in support
of real estate activity were all dated during Christmas and
Labor Day weekend holidays. The travel was largely to Indiana,
where taxpayer's son and former wife live. Taxpayer insisted
he had a good faith profit motive and stated to the court
"the Internal Revenue Service and this Court should not be
permitted to decide otherwise since they allegedly lack any
brokerage experience." (Bradbury, T.C. Memo 1996-182) |
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| RESORT WINNER: Resort
in Costa Rica, including sailboats, was a business. Taxpayer
worked at resort and met other test. (Akerson, T.C. Memo
1998-129) |
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| HORSE RACING LOSER: Horseracing
activities did not have required profit motive. Taxpayer,
who ran a temporary employment agency, could not prove an
actual and honest profit motive. (Hunt, T.C. Memo, 1996-388) |
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| GOLFING LOSER BUT WORTH
IT: Taxpayer was an optical engineer for over
30 years before he was laid off, after which he became
a "professional golfer." He failed to qualify for the senior
tour and took a total of 4 golf lessons during his "professional"
career. His Schedule C reflected zero gross income and
expenses of $16,384. Without earning any income (and considering
the foregoing), the taxpayer "failed to establish that
his golfing activity was carried on with the actual and
honest objective of making a profit." (Courtville, T.C.
Memo 1996-134) |
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