Archive for July, 2011

As we’ve discussed in the past, the regulations provide nine factors under Section 183 that are used to determine whether a taxpayer’s activity is a “trade or business” or a “hobby.” If the activity is a trade or business, losses of the activity may be deducted in full and can offset other sources of income, subject to certain limitations. If the activity is a hobby, a taxpayer can only deduct losses to the extent of the income. 

The factors are:

1. The manner in which the taxpayer carries on the activity. Do they complete accurate books? Were records used to improve performance? 

 2. The expertise of the taxpayer or his advisers. Did the taxpayer study the activities business practices? Did they consult with experts?

 3. The time and effort expended by the taxpayer in carrying on the activity. Do they devote much of their personal time and effort?

 4. The expectation that the assets used in the activity may appreciate in value. Is the plan to generate profits through asset appreciation?

 5. The success of the taxpayer in carrying on similar or dissimilar activities. Have they converting them from unprofitable to profitable?

6. The taxpayers history of income or losses with respect to the activity.  Has the taxpayer become profitable in a reasonable amount of time?

 7. The amount of occasional profits. Even a single year of profits can be a strong indication that an activity is not a hobby.

8. The financial status of the taxpayer. Does the taxpayer have other income sources that are being offset by the losses of the activity?

 9.  Does the activity lack elements of  personal pleasure or recreation? If the activity has large personal elements it is indicative of a hobby.

In a rarely seen run of failure, the taxpayer in Zensen v. Commissioner lost ALL NINE factors, leaving the Tax Court an easy decision in holding that the taxpayer’s drag racing activity was a hobby.

Full cite: Zensen v. Commissioner, T.C. Memo 2011-267.

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I kid, I kid.

On Saturday afternoon, Derek Jeter took a few hours off from bedding supermodels to launch career hit #3,000 into the 7th level of hell left field seats at Yankee Stadium, reaching a milestone that cemented the shortstop’s place among the best to ever don pinstripes. Given the magnitude of Jeter’s accomplishment, few could have imagined that much of the subsequent attention would focus on the man on the receiving end of the historic homer.

Jeter’s shot was eventually corralled by 23-year old cell phone salesman Christian Lopez, who both literally and figuratively had a winning lottery ticket fall into his lap. Lopez was certainly entitled to take his ball and go home, as so many before him have done, to capitalize on capitalism and sell his slice of history to the highest bidder. People in the know have pegged the value of the ball at $250,000, a life-changing sum for a recent college graduate like Lopez. 

Instead, Lopez graciously returned the ball to Jeter, asking for nothing in return; a laudable act that both warms my heart and challenges my life-long contention that all Yankee fans are inherently evil. The team’s brass was equally impressed, and they made certain that Lopez didn’t leave the staidum empty handed:

… Lopez will receive four tickets to a suite for every remaining game at Yankee Stadium this season (including any possible playoff games) plus first row Legends Suite tickets to Sunday’s game. He also received an assortment of bats and jerseys signed by Jeter…

All of this leads to one compelling question: Will the IRS seek to tax Lopez on the value of his parting gifts?

The Internal Revenue Code makes a habit out of taxing accretions to wealth, and I’m guessing the value of those tickets — four each for the remining 33 regular season home games and several more for the inevitable playoff run –is well in excess of $50,000, certainly qualifying as an accession to Lopez’ wealth.

There are three ways the IRS could approach this situation, only one of which won’t assure the Service’s continued position as America’s most reviled government agency for the next 20 years:

1. The IRS could treat Lopez as having received compensation equal to the fair market value of the free tickets and autographed gear and immediately assess tax. The IRS certainly has the ammunition to do so under either Treas. Reg. 1.61-1, which states, “Gross income includes income realized in any form, whether in money, property, or services” or the “treasure trove” regulations of Treas. Reg. 1.61-14, which provides “Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.”

Unlike the challenges the IRS faces in assigning a value to a found ball, it would not prove difficult for the Service to determine the value on the tickets awarded to Lopez,  making immediate taxation much more likely. Despite the public outcry that will likely ensue, this appears to be the most likely result.

2. When Mark McGwire hit his historic 62nd home run in 1998, an IRS agent went on record as saying that if a fan caught the ball and simply handed it back to McGwire, the fan would be treated as having made a gift equal to the value of the ball, incurring a hefty gift tax. The IRS could revisit this approach in this case, asserting that Lopez made a gift of $250,000 to Jeter.

3. Lastly, the IRS could allow a good deed to go unpunished, ignoring the treasure trove regulations and allowing the value of the ball, tickets and memorabilia to go untaxed unless Lopez should sell the tickets or gear at some point in the future. As dicussed above, because of the relatively certain value of the tickets received, unfortunately for Lopez, this would seem to be a very unlikely result.

Update: The NYT published an article on exactly this topic this morning.

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You know that pricey day camp you and the misses are counting the hours towards, with the hopes that it will keep little Billy out of your hair for a few hours a day and remind you of the relative serenity of the school year? Well, it may just qualify for a dependent care credit. Straight from the mouth of the IRS:

Along with the lazy, hazy days of summer come some extra expenses, including summer day camp. But, the IRS has some good news for parents: those added expenses may help you qualify for a tax credit.

Many parents who work or are looking for work must arrange for care of their children under 13 years of age during the school vacation.

Here are five facts the IRS wants you to know about a tax credit available for child care expenses. The Child and Dependent Care Credit is available for expenses incurred during the summer and throughout the rest of the year.

  1. The cost of day camp may count as an expense towards the child and dependent care credit.
  2. Expenses for overnight camps do not qualify.
  3. Whether your childcare provider is a sitter at your home or a daycare facility outside the home, you’ll get some tax benefit if you qualify for the credit.
  4. The credit can be up to 35 percent of your qualifying expenses, depending on your income.

You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

The opportunity for a little afternoon delight AND a tax credit come next April? Money well spent, I’d say.

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