7th Circuit: Horse Racing Venture Was A Business
BY SCOTT ROBERTS FOR INDIANA LAWYERÂ
An Indiana man who ran a horse racing business had his tax deficiencies for the 2005 and 2006 tax years voided by the 7th Circuit Court of Appeals after Judge Richard Posner ripped apart an opinion by the U.S. Tax Court.
Merrill Roberts became interested in horse racing in 1999 and built a horse track on land he owned in Indianapolis. In 2005, he decided to build a bigger horse training facility, but built it in Mooresville after the city of Indianapolis opposed the construction. The U.S. Tax Court found in 2005 and 2006 he had erroneously deducted the expenses of his horse racing business because it was only a hobby during those years. The court assessed tax deficiencies of $89,710 for 2005 and $116,475 for 2006. In 2007, the court declared it a business, and it has been considered a business ever since.
Posner wrote the decision was “untenable; it amounts to saying that a business’ start-up costs are not deductible business expenses – that every business starts as a hobby and becomes a business only when it achieves a certain level of profitability.†Posner said Roberts’ business did not begin in 2007 but 2005, when he decided to build a large training facility.
He pointed out an inconsistency in the ruling when the Tax Court said Roberts did not purchase the Mooresville property to run a business, but said the business didn’t start until it began functioning at the property. “The judge seems not to have understood that the decision to build the facility, and its construction, are also indications of a profit motive.â€
The Tax Court based its ruling off a “goofy regulation†Posner wrote, citing 26 C.F.R. Section 1.183-2, Treas. Reg Section 1.183-2: Activity Not Engaged in for Profit Defined.†The regulation says that the court can use another test as long as the court proves the other factors are insufficient.
However, even when using the test, which has nine factors, Roberts’ horse racing venture was a business. All nine factors supported or at least were neutral about his horse racing venture. “It may have been a fun business, but fun doesn’t covert a business to a hobby. If it did, Facebook would be a hobby, Microsoft and Apple would be hobbies, Amazon would be a hobby, etc. ad infinitum,†Posner wrote.
The case is Merrill C. Roberts v. Commissioner of Internal Revenue, 15-3396.
What is so surprising about this particular case is why did the IRS go the hobby route when they may have found success in the passive activities approach. Yes the deductions would have been allowed but delayed until either Mr. Roberts had other passive income to offset the passive suspended losses or until he sold the facility. The other issue that exist is many experience revenue agents have retired and the newbyies are so ill-equipped to deal with the complexities of the Revenue Code. So, they come up with the most ridiculous issues and of course most of the Tax Court Judges are former IRS officials, thus stand to reason that over 90% off the Tax Court Decisions are pro-Govt. Kodo’s to the Seventh Circuit, those Judges are objective and rational unlike many other Circuit Courts of Appeal. What Mr. Roberts should have considered paying the tax and going straight away to the Seventh Circuit and avoid the extra legal expense.
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