Tax – Business Deduction for Expenses

Listen to this article

7^th Circuit Court of Appeals

Case Name: Merrill C. Roberts v. Commissioner of Internal Revenue

Case No.: 15-3396

Officials: POSNER, EASTERBROOK, and WILLIAMS, Circuit Judges.

Focus: Tax – Business Deduction for Expenses

Tax Court improperly upheld IRS deficiency assessments against Appellant.

“Notice too that the factors in the Treasury Regulation overwhelmingly favor Roberts’ claim that even in 2005 and 2006 his horse‐racing enterprise was a business. He conducted it in a businesslike way (factor 1). He prepared by extensive study (to obtain a training license) (factor 2). He largely withdrew from his previous businesses in order to devote “most of his energies” to his horse‐racing enterprise (factor 3). He expected to derive an eventual profit from the enterprise, including profit in the form of appreciation of the value of the land and buildings used in the enterprise (factor 4)—it’s not as if he were a billionaire indifferent to the modest profit that probably was all he could expect from horse racing. Entering the restaurant business on a small scale in his twenties, Roberts had suffered setbacks that prevented his business from being an immediate success—indeed his first restaurant burned down and the insurance settlement was too small to enable him to rebuild it as a full‐service establishment. Yet he “grew” the business to large dimensions over time, a pattern consistent with his attempting to repeat the process in his horse‐racing venture in 2005 and 2006 (factor 5). “A series of losses during the initial or start‐up stage of the activity may not necessarily be an indication that the activity is not engaged in for profit” (factor 6)—that’s this case, all right. A “substantial profit, though only occasional, would generally be indicative that an activity is engaged in for profit” (factor 7). The Tax Court awarded this factor to Roberts because he earned money from racing his first two horses and the growth in the prize purses (owing to the slot machines) could be expected to increase his income in the future; that one of his horses was nominated to run in the Triple Crown Races suggested that his horses might eventually achieve greater success.”

Reversed

Full Text

Attorney Derek A. Hawkins is the managing partner at Hawkins Law Offices LLC, where he heads up the firm’s startup law practice. He specializes in business formation, corporate governance, intellectual property protection, private equity and venture capital funding and mergers & acquisitions. Check out the website at www.hawkins-lawoffices.com or contact them at 262-737-8825.