The Tax Blotter - July 2017

A look at weird tax news from recent weeks:

The tax law allows you to deduct losses incurred from a business activity, but expenses of a “hobby” are limited to the amount income from the activity. Frequently, taxpayers have to convince a court that they’re legitimately engaging in an activity to turn a profit. Here are three of the latest examples. 

Murder, he wrote? Although his father’s death was called a suicide, a taxpayer pursued a decade-long search for a killer, based on an anonymous letter he had received. Along the way, he commissioned someone to write a manuscript about the event and spent hundreds of thousands of dollars on private investigators. Eventually, the IRS challenged his deductions for business expenses. Now the Fifth Circuit Court has agreed with the IRS. The taxpayer showed no profits, lacked a business plan and had no experience in these matters (Vest, CA-5, 6/2/17).

Yellow flag comes out. A taxpayer formed a racecar driving team that competed sporadically over several years. In claiming business losses, he relied on a “tax law presumption” that says you’re presumed to be in business if you show a profit in three of five consecutive years. But the taxpayer reported losses in three of the five years, not profits, so the presumption didn’t apply. Note that the presumption is available for horse racing activities, but not car racing, if you show a profit in only two out of seven years (Stettner, TC Memo 2017-113, 6/4/17).

Hooray for Hollywood? If you claim a large loss from an activity in the same tax year you report a high salary, you’re likely to run into trouble with the IRS. In a new case, a taxpayer reported $250,000 in wages from his corporate gig in 2013, but he also claimed a $32,00 loss for scheduling film festivals at colleges and universities. He didn’t have a business plan, kept sloppy records and lacked practical experience in this business. Accordingly, the Tax Court turned thumb’s down on the loss (Zudak, TC Sum. Op. 2017-41, 6/19/17).