Not For Profit Activity

[jainen]

In Tax Court Memo 2011-167, a race car driver was denied losses. The court gave an unusually clear analysis of the hobby factors. According to Checkpoint RIA, "Lack of honest profit objective was shown by overall facts and circumstances, including that taxpayer didn't keep books or written records, had no formal business plan or annual budget and expense forecasts, and didn't otherwise operate activity in business-like manner. It was also telling that although he had significant experience in drag racing and did seek advice on how to improve cars' performance, he didn't seek out expert advice on activity's economic aspects; derived significant personal pleasure from activity; and incurred significant, potentially tax-beneficial losses therefrom."

The court said a taxpayer must have a good-faith expectation of profit, looking at objective facts more than the taxpayer's statement of intent. One argument the court did not accept is that assets will appreciate in value. It said the increase in value was not due to success in the drag racing activity. The court even tossed out all his receipts because he had not used them "as a management tool to reduce expenses or increase profitability." Interesting reading.

[TAXBILLY]

http://www.ustaxcourt.gov/InOpHistoric/ZENZEN.TCM.WPD.pdf

taxbilly