Hobby Loss Case

Taxation Presentation

Background

Mr. Crane is a respected professor of theater and also write plays. He deducted his playwriting expenses as a Sch. C business loss. IRS disallowed the losses. IRS’s position is to deny that Mr. Crane’s playwriting is a trade or business.

Mr. Crane is an expert in theatre, is entitled to deduct the losses he incurred from his research, writing, traveling activities because he has a genuine hope, although it may have been nreasonable, of producting a profit from these activities and therefore, he is engaged in those activities form profit.

He conducted his activities in a businesslike manner as evidenced by the fact that he kept accurate records, changed his operating methods to gain wider distribution of his ….., and began receiving fees for his writing services.

Questions to consider:

• Was Mr. Crane’s playwriting an activity entered into for profit?

• If it was, did he meet his burden in substantiating each expense and its relationship to his playwriting activities as required under the Code?

• Does he owe an accuracy-related penalty?

Mr. Crane must show:

Mr. Crane must establish that he engaged in the activity with the primary purpose and intent of making a profit. His expectation of profit need not be a reasonable one but he must have a bona fide expectation of realizing a profit.

Assumptions we can make to enrich the case:

Mr. Crane conducted his playwriting and research in a systematic manner and spent a substantial amount of time and money on his projects. Although he has not received any income, he has obtained several awards on his work and attempted to promote his work.

Any notable success resulting from his playwriting activities?

Factors to consider:

(1) the manner in which the taxpayer carries on the activity

(2) the expertise of the taxpayer or his advisors

(3) the time and effort expended by the taxpayer in carrying on the activity

(4) the expectation that assets used in the activity may appreciate in value

(5) the success of the taxpayer in carrying on other similar or dissimilar activities

(6) the taxpayer’s history of income or losses with respect to the activity

(7) the amount of occasional profits, if any, which are earned

(8) the financial status of the taxpayer

(9) and whether elements of personal pleasure or recreation are involved.

The test would be whether the “activity is not engaged in for profit.”

Points to undermine:

He merely continues his lifelong interest in the playwriting and charing fees for his work in order to help defray his out-of-pocket expenses.

IRS may contends that Mr. Crane does not carry on his activities in a businesslike manner, because he did not maintain accurate books and records and failed to