Ice Skater - Sch C or Hobby

[ETax847]

Hey team.  I had a prospect walk into my office today who is a pro ice skater and has been for the last 4 years.  She has not been profitable for the last 4 years including this year.  Should she be a Sch C?

[Catherine]

If her motive is profit, my answer would be yes.  

I successfully got a "no change" on a partnership audit, because of years of regular losses.  They partners ARE in it for a profit motive.  They're just really bad business-people.  That first part IS in the IRS regs, and the second part is NOT.  I think the main part of my argument was simply that incompetence does not preclude profit motive, and was able to show that motive as well as (futile) steps taken to improve.  That's a long-winded way of stating the simple fact that several years of losses does not, prima facie, constitute lack of profit motive.

If, however, she still skates professionally "because she loves it" and would do so even if never paid, then you have a hobby.  If she is working on her standing to open a school, then you're in a gray area; does she have profit motive for what she is doing currently?

[DANRVAN]

On 11/20/2019 at 8:44 AM, ETax847 said:

Should she be a Sch C?

That depends on the facts and circumstances. Tax courts usually do not rule in favor of losses wrote off from activities that involve sporting or competitions.

Some factors to consider are how much time she spends at the activity, how much money has she made or lost, and what are her other sources of income.

If she is devoting 40 hours a week at it while living in a cardboard box and flipping burgers part time to get by until her ship comes in, then she might have a case.

If on the other hand she has a six figure salary and does the dancing in her spare time then most likely it is a hobby.

 

 

[DANRVAN]

17 minutes ago, DANRVAN said:

If she is devoting 40 hours a week at it while living in a cardboard box and flipping burgers part time to get by until her ship comes in, then she might have a case.

If on the other hand she has a six figure salary and does the dancing in her spare time then most likely it is a hobby.

 

Those are the black and white cases with a lot of gray in between.

 

[BulldogTom]

Take a look at Whitehurst v Commissioner for a winning case from 2003.  Professional Bowler.   This is a TC Summary Opinion and cannot be cited, but it lays out pretty well what the TP needs to provided to get a win on these cases.  

Tom
Modesto, CA

 

[DANRVAN]

On 11/23/2019 at 2:13 PM, BulldogTom said:

Commissioner for a winning case from 2003.

One of the key factors in that case was that the taxpayer abandoned the activity because it was not profitable,  the tax courts have a history of recognizing that as a factor in determining whether or not  the taxpayer was engaged in an activity for profit. 

That was also a factor in Engdahl  (retired doctor raising and showing horses), Canale (motorcycle racing) and Morrissey (bank exec, weekend drag racing). Morrissey actually argued his own case and won.

So in order to use these as model cases, the taxpayer needs to quit the activity due to lack of profit.

 

[BulldogTom]

10 hours ago, DANRVAN said:

One of the key factors in that case was that the taxpayer abandoned the activity because it was not profitable,  the tax courts have a history of recognizing that as a factor in determining whether or not  the taxpayer was engaged in an activity for profit. 

That was also a factor in Engdahl  (retired doctor raising and showing horses), Canale (motorcycle racing) and Morrissey (bank exec, weekend drag racing). Morrissey actually argued his own case and won.

So in order to use these as model cases, the taxpayer needs to quit the activity due to lack of profit.

 

That is true, but the point I was making is the case lays out a very detailed analysis of the factors the court looks at in determining a profit motive.   There are lots of other factors, and just quitting when it did not work out is not the only thing the court looks at.   If just quitting an unprofitable hobby...uh... business activity... was the determining factor, I could go try to be a professional skier for 3 years, then quit and say it did not work out, and get 3 years of snow skiing deducted.  

Tom
Modesto, CA

[DANRVAN]

2 hours ago, BulldogTom said:

the case lays out a very detailed analysis of the factors the court looks at in determining a profit motive.

I agree with that, the court analyzed both the favorable and unfavorable factors in reaching a decision on the profit motive as it has in other cases.

However, somewhere in the past I recall  this case referred to as a model for beating the IRS, which it is not.  While there were some other favorable factors (and some unfavorable, like less than desirable records and lack of a separate bank account) the pivotal factor in the case was the abandonment of the activity.