Donald Carl Barker is the rare man with three names who failed to fulfill his destiny of becoming a serial killer, Nascar driver, or high profile assassin, and instead actually did something useful with his life. Barker works for NASA, and he’s made it his personal mission to enable humans to one day colonize Mars, where we’ll create a utopian society where jet packs are abundant, high-fives replace cash as currency, and we’re free to marry our attractive cousins without judgment.
Barker has the education necessary to make his dreams a reality: a double bachelor of science in physics and psychology, a master’s degree in physics, psychology and math, another master’s degree in space architecture, and at the time of his appearance in front of the Tax Court, a half completed Ph.D. in geology. Kinda’ puts your Liberal Arts degree to shame, no?
Alas, in all that learning, Barker never garnered an understanding of the finer points of the Internal Revenue Code. In 2003, Barker launched a Schedule C “business” called Mars Advanced Exploration & Development, Inc. (MAXD), which was established to obtain funding for various technologies relating to exploring the Red Planet.
Over the next half decade, MAXD sporadically pursued its goals: submitting a funding proposal to NASA in 2003 (denied), applying for a patent in 2005 (also denied), and publishing a design study in 2008. Over that same span, it generated exactly zero dollars in revenue.
None of that kept Barker from deducting expenses in each year, including $7,500 in 2006. The IRS denied the expenses, arguing that MAXD never actually…you know…did anything, and thus wasn’t engaged in an active trade or business.
The Tax Court was left to decide whether MAXD’s activity did in fact rise to the level of a trade or business, necessitating a review of three factors previously established by the courts:[i]
(1) whether the taxpayer undertook the activity intending to earn a profit;
(2) whether the taxpayer is regularly and actively involved in the activity; and
(3) whether the taxpayer’s activity has actually commenced.
To determine whether Barker undertook the activity intending to earn a profit, the Tax Court analyzed the nine regulatory “hobby loss” factors,[ii] which quite frankly, we’ve beaten to death on this blog, discussing it here, here, here, and here. The factors are:
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 the assets used in the activity may appreciate in value; 5. The success of the taxpayer in carrying on similar or dissimilar activities; 6. The taxpayers history of income or losses with respect to the activity; 7. The amount of occasional profits; 8. The financial status of the taxpayer; and 9. Whether the activity lack elements of personal pleasure or recreation.
In ruling that MAXD did not carry on a trade or business, the court held that Barker failed to keep accurate books and records, did not expend significant time on the activity during the year at issue, and was generating consistent losses that were offsetting Barker’s compensation income from his NASA job.
Next, the Tax Court addressed the second factor: whether Barker was regularly and actively involved in MAXD. Because Barker was working two jobs while also pursuing his Ph.D., the court found there was insufficient evidence to establish that Barker was involved with MAXD with any regularity.
With regards to the final factor, there remained no reason to determine whether MAXD had commenced its business, since the court had already held that thre was no business. Thus, the Tax Court thus sided with the IRS, holding that Barker’s purported business expenses were not allowable.
Barker’s loss, however, is the American people’s gain. With this defeat behind him, Barker can refocus his efforts on helping NASA with its most daring and exciting project yet: blowing up the moon:
[i] Commissioner v. Groetzinger, 480 U.S. 23 (1987); McManus v. Commissioner, T.C. Memo. 1987-457, aff’d without published opinion, 865 F.2d 255 (4th Cir. 1988).
[ii] Treas. Reg. §1.183-2(b).