A Tax Court Summary Opinion is an opinion issued under the Tax Court’s small case procedures. While a Summary Opinion cannot be precedential, it can be instructive. The Tax Court addressed the issue of hobby loss disallowance under IRC Section 183 in Ryberg, T.C. Summary Opinion 2012-24 filed March 12, 2012. One can deduct losses from a business. One cannot deduct losses from a hobby.
The case addressed the tax year 2006. Each of the Ryberg spouses pursued an interest. The wife (referred to herein as “Mrs. R.”) bred horses for about nine years. The husband (referred to herein as “Bubba”) was a “professional” drag racer for about 20 years. Both had 40-hour per week day jobs.
Mrs. R. was a certified horse judge. In preparation for starting her operation, she took university courses concerning horse breeding. She took a law school class on horse breeding contracts. She studied the markets, attended horse auctions, and delved into the technical and business aspects of horse breeding. Mrs. R. devised a business plan focusing on a niche market. When she was not at her day job, Mrs. R. was working in the breeding operation and doing everything there was to do in the enterprise. She kept a ledger and prepared monthly financial and analytical reports. When he wasn’t drag racing, Bubba helped Mrs. R. According to the Tax Court: “On some occasions, [Bubba] would spend the entire weekend spreading manure for compost.” After a series of setbacks – a bad market, West Nile virus, unusually high feed costs, her cancer and Bubba’s injuries, Mrs. R. gave up the breeding operation in 2006.
Bubba had a 1968 Chevrolet Rally Sport Camaro, modified it for drag racing, and started racing in 1990. By the time the case went to trial, he had raced for 20 years and never had a money-making season. He had a few people sponsor him; in exchange, they put their decals on his Camaro and his trailer. He solicited drag racing tips from his buddies, but never consulted with anyone about the business aspects of racing. The Tax Court pointed out that Bubba “allegedly tracked his expenses using a spreadsheet.” He did not provide at trial a copy of the spreadsheet or any documents that he “allegedly” maintained. The Tax Court seemed to conclude that his full-time job as a spray painter probably did not give him any “particular expertise in the business, financial, or economic aspects of drag racing.”
The Tax Court ruled that Mrs. R. had a business and that Bubba had a hobby. Can you see the difference between a business and a hobby?