A yearly question: Business or hobby?

A recent Tax Court decision serves to re-emphasize that, when the owner of a hobby-like activity meets the requisite profit motive in one year, the courts may not necessarily apply that profit motivation to other years. Each year will be tested on its own.

Merrill Roberts is a former nightclub owner who became a horse breeder. Despite his rudimentary recordkeeping system and history of large losses, his profit objective was shown by the following facts:

  • He liquidated his old, unsuitable facility and moved his activity to new property on which he built a premier training facility.
  • He hired an assistant trainer.
  • His accounting methods allowed him to make informed business decisions.
  • He consulted with bloodstock agents and respected trainers on various business aspects.

Further, Roberts was asked by peers to run for leadership roles in professional horse racing organizations and lobbied for horse racing interests. He spent substantial time on business and was successful in his prior business ventures.

However, the court found that Roberts did not engage in the activity with the required profit motive during the earliest two years involved in the case. The court determined that his primary motivation in those years was as an investor in real estate.

The court said that Roberts’ participation in horse-related activities during those two years was equally divided between the social aspects and the business aspects of horse racing (Merrill C. Roberts v. Commissioner, TC Memo 2014-74, April 29, 2014).

Roberts avoided accuracy-related penalties during the earlier years by demonstrating reasonable cause/good faith for his tax positions.