Friday, March 1, 2013

Is it a Hobby or is it a Business?

Here are some recent tax court rulings:

Income Tax—Private Coaching Activity Is Not a Hobby: The taxpayer was an assistant track coach at Oregon State University, an athletic coach for Nike, and had long been involved with coaching and other activities connected to track and field. He began private coaching activities in addition to teaching and coaching high school track. Over a period of nine years, the private coaching activities generated total losses of $153,488. The Tax Court held that the losses from the private coaching activities were not limited under IRC Sec. 183. The following factors weighed in the taxpayer's favor: (1) a business-like approach where he sought ways to improve his success and abandoned other activities; (2) expertise in track and field coaching; (3) devoting a large portion of nonemployment time to the activity that negatively affected his marriage and personal life; and (4) his salary earned as an educator/coach was $55,000 to $65,000, making it more likely that his private coaching expenses were a financial hardship. John Parks III , TC Summ. Op. 2012-105 (Tax Ct.).

Income Tax—Activity Engaged in for Profit (Hobby Loss): Taxpayer was a successful salesperson and also operated a sprint car racing activity (Sernett Motorsports). He began racing sprint cars in 1975, when he was 19, and raced for various racing groups for 15 years before purchasing his own equipment in 1992. During the years at issue, taxpayer owned multiple race cars and a full-sized semitrailer, and owned or leased a shop in Lakeville, Minnesota. From 2000 to 2010, he reported losses totaling $629,470 on Schedule C. Of the nine factors listed in Reg. 1.183-2(b) for determining whether taxpayer intended to earn a profit from the activity, the Tax Court found that four favored the IRS, two favored taxpayer, and three were neutral. Because Sernett Motorsports was a mature activity, the Tax Court placed particular emphasis on its history of significant, sustained losses and taxpayer's inability to reduce expenses or increase income in finding that taxpayer did not have an actual, honest profit objective in operating Sernett Motorsports for Section 183 deduction limitation purposes. John Sernett , TC Memo 2012-334 (Tax Ct.).

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