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Working Hard and Losing Your Wife’s Money is Not a Hobby

March 01, 2013 | Written by: Silas Zirkle, EA
Old Restored Car
By the time I started working this case, the IRS Revenue Agent had already determined that the Member’s business restoring classic automobiles was not a valid business, but a hobby. He had disallowed the business losses claimed under the hobby loss rules, which allow expenses to be claimed only to the extent of income for activities that are deemed to be without a profit motive. My job was to change his mind, and I knew it wouldn’t be easy when I looked at the documents.

The Member had gross receipts of $138,233 for 2008 and $98,945 for 2009. The Schedule C net business losses for the two years were $11,361 and $29,863, respectively. He had started the business in 2004, and had only shown a profit in one year of the six years. That was in 2007, and it had been only a small profit. A Notice of Deficiency proposed increases in taxes, interest, and penalties totaling $72,228 for both years.

I started out by going over with the Member the nine relevant factors the Tax Court uses to determine whether or not a business activity is presumed to be operated for profit. For each factor we focused on proving his intention to make a profit despite the actual outcome of five losses in six years. After gathering the facts and feeling confident about my ability to defend the Member, I set up an appointment to speak with the Appeals Officer.

I explained to the Appeals Officer that the business had no components of being a hobby. The level of gross receipts alone was a very strong indicator that it was not just a hobby. “Working your butt off and losing your wife’s money at the same time doesn’t qualify as a hobby in anybody’s book,” I said. The Appeals Officer countered that the exam work papers painted a completely different picture, one of a taxpayer who used his car restoration activity as a tax shelter to lower his wife’s wages from her work as a Registered Nurse.

I continued to argue on the intent issue. The taxpayer was losing real dollars, I reasoned, and it was a lot more of a loss than it needed to be to shelter his wife’s wages. Moreover, the activity had no attributes of being a hobby at all.

Ultimately, I managed to convince the Appeals Officer to see it my way, and the case was closed with a “no change” decision document. The Member was delighted to be relieved of his $72,000 tax burden, as was his wife! Telling him the good news made me quite happy too.

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