Tax Research Assignment – Project III
To: Jennifer Woods
From: L. Bromfield
Date: July 8th, 2012
Re: Expense deduction for AGI against winnings of prize money and sponsorship income.
You have been employed for the last six years as a manager by Ski USA, a distributor of ski equipment and boots.
In the past two years you have participated in over 50 races annually as a professional bicycle racer and incurred annual expenses that exceeded your annual income.
You worked lighter schedule during the racing season by utilizing your vacation time and has been ranked in two events by the National Biking Association.
You have worn full-face helmet, chest protector, knee ...view middle of the document...
2d 724, 726 (9th Cir.1986), affg. Lahr v. Commissioner, T.C. Memo.1984-472.
The expectation of profit need not have been reasonable, but it must be bona fide. See Golanty v. Commissioner, 72 T.C. 411, 426 (1979), affd. without published opinion 647 F.2d 170 (9th Cir.1981); sec. 1.183-2(a), Income Tax Regs. Whether the requisite profit objective exists is determined by looking to all the surrounding facts and circumstances. Golanty v. Commissioner, supra at 426; sec. 1.183-2(b), Income Tax Regs. Greater weight is given to objective facts than to a taxpayer's mere after-the-fact statement of intent. Indep. Elec. Supply, Inc. v. Commissioner, supra; Thomas v. Commissioner, 84 T.C. 1244, 1269 (1985), affd. 792 F.2d 1256 (4th Cir.1986); sec. 1.183-2(a), Income Tax Regs. Petitioners bear the burden of proof. Rule 142(a).
Section 1.183-2(b), Income Tax Regs., provides a list of factors to be considered in the evaluation of a taxpayer's profit objective: (1) The manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisers; (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 loss with respect to the activity; (7) the amount of occasional profits, if any, from the activity; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation. This list is nonexclusive, and the number of factors for or against the taxpayer is not necessarily determinative but rather all facts and circumstances must be taken into account, and more weight may be given to some factors than to others. See sec. 1.183-2(b), Income Tax Regs.; cf. Dunn v. Commissioner, 70 T.C. 715, 720 (1978), affd. 615 F.2d 578 (2d Cir.1980).
The facts submitted here establishes that your primary, predominant, or principal motive for engaging in the bicycle racing activity was not for profit.
A. Manner in Which the Activity Is Conducted
While you did keep records, they did not your intent of actually conducting a business therefore making a profit was not your sole intent.
Even though you had records reporting substantial losses, you never developed a written business plan or made a budget. Your participation in multiple races over the past two years earning sponsorship income and prize money and does not constitute a business plan.
B. Expertise of Petitioners and Their Advisers
You have been ranked in two events by the National Biking Association and had indicated that you have extensive experience in bicycle racing by training on a daily basis however you have also demonstrated that your main source of income was your full time job as a manager at Ski USA. Not once have you mentioned your intent to enter bicycle racing as a means earning income.
C. Time and Effort Expended by...