Sunday, January 8, 2012

The Finish Line?

To all my readers and friends,

Due to some personal issues that have arisen, this will be my last post to this blog.

I've enjoyed writing it and doing the research, but I have to put it to rest for the foreseeable future.

Many thanks to all those who've following it (There's been over 1,000 views since it began on March 12th of last year). I hope you were able to get some information to assist you in your racing activity, or at least increase your appreciation of how tax law prevades just about everything we do here in the U.S.

Best wishes to all!

Phil Schurrer

Thursday, December 22, 2011

North Carolina Motor Sports Taxation

Let’s look at some selected North Carolina tax provisions that deal with motor sports. (I chose North Carolina because it seems to have more tax rules that touch on motor sports than most other states.)

But even if you have no interest in North Carolina taxation specifically, there are several points to keep in mind regarding state taxation in general:

· First, the level of detail, specifications and definitions are critical in state taxation, particularly in sales and use taxes.

· Second: be aware of the dates. Tax laws are enacted, expire or are revised and these all have effective dates.

· Third: the proper state form must be used, documentation must be kept, and the due dates for the returns must be followed. Failure to do so can result in the loss or denial of a tax benefit or refund.

· Fourth: some of the computations tend to be complex. Professional help is often needed.

With these thoughts in mind, let’s look at a few North Carolina tax laws that affect motor sports.

* * * * * * *

Income Tax Credit For Purchases by Motor Sports-Related Entities

There’s a credit against North Carolina income taxes that can be claimed by eligible taxpayers who purchase or lease qualified items. These items must be placed in service in North Carolina[1].

These “eligible taxpayers” must be:

· Engaged in certain types of businesses,

· Provide health insurance,

· Have a good record regarding environmental and OHSA matters,

· Have no overdue tax deficiencies, and

· Meet certain wage standards.

There are twelve primary activities that can qualify for the credit. Of interest to us are two: a motor sports facility and a motor sports racing team[2].

The actual credit equals a certain percentage of the qualified investment above a certain amount. This amount depends on the North Carolina development area in which the business is located. There’s a further limitation on the tax benefit: the investment must exceed the cost of all the taxpayer’s investment in a base year. The rules tend to be complex and the limitation depends on the North Carolina county in which the business is located[3].

There are also limitations on how much tax the credit may be applied against[4].

This credit is scheduled to expire for business activities after December 31, 2012.

* * * * * * *

What’s a “Professional Motor Sports Racing Team”?

North Carolina tax rules define this term as a racing team that:

· Is operated for a profit,

· Has a majority of its revenues coming from either sponsorship of the racing team or from prize money, and

· Competes in at least 66% of the races sponsored in a single season by a motor sports sanctioning body[5].

* * * * * * *

Partial Refund of North Carolina Sales and Use Taxes Paid By A Professional Motor Sports Racing Team.

After July 1, 2007, a professional motor sports racing team can obtain an annual refund of 50% of North Carolina Sales and Use Taxes paid on certain items that become a part of a professional motor racing vehicle. The refund request is due by December 31 of each year for the prior fiscal year that ends June 30. Use form E-585S. This provision is repealed for purchases made after December 31, 2013

What are “items that becomes part of a motor racing vehicle”? Examples include parts, axles, batteries, bumpers, chassis, engines, seats, sheet metal, steering wheels, transmissions and wheels.

Examples of “accessories” that the sales tax refund does not apply to include tires, brake fluid, decals, drivers comfort equipment (such as drink bottle holder, cooling unit, hans devices, heat-resistant pads), fuel, grease and lubricants, Locktite, motor oil, radios, shop supplies, tear-offs, tools, track equipment, Instrumentation, telemetry, consumables, paint and welding gas[6].

* * * * * * *

Refund of Aviation Fuel Sales Taxes.

North Carolina sales and use taxes paid on aviation fuel can be refunded if the fuel is used to transport a professional motor sports racing team or a motor sports sanctioning body:

· To or from a motor sports event in North Carolina from a point inside the state

· To a motor sports event in North Carolina from outside the state

· From a point in North Carolina to a motor sports even outside the state.

A “motor sports event” includes a motor sports race, a motor sports sponsorship event, or motor sports testing[7].

This provision expires for purchases made after December 31, 2012[8].

* * * * * * *

Different states have different rules regarding the tax treatment of motor sport activities – Ohio and Indiana, to name two states in addition to North Carolina. The important thing to remember is each state is different. Also, keep in mind that some jurisdictions may be curtailing benefits due to the lack of state revenue caused by the current economic situation.

* * * * * * *

Contact me by email at phil.schurrer.racingprof@gmail.com if you or your group would be interested in a detailed presentation about this topic or other tax and financial aspects of motor sports. I'd also be interested in any comments you have about the blog or suggestions for future topics

Best wishes for a Merry Christmas and a Happy Holiday Season!

Until next time …

Phil Schurrer, CPA

- Adopted from a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers.

To insure compliance with the requirements imposed by the IRS, you are informed that any U.S. federal tax advice contained in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of

- Avoiding penalties under the Internal Revenue Code, or

- Promoting, marketing or recommending to another party any transaction or matter addressed therein.

Taxpayers should seek professional advice based on their particular circumstances.

Attorneys and other professionals dealing with specific matters and situations should also research original sources of authority.

[1] Sections 105-129.88, 105-129.83 G.S.

[2] Sec. 105-129.83(b) G.S.

[3] Sec. 105-129.88(a), (b) and (c) G.S.

[4] Sec. 105-129.84(b) G.S.

[5] North Carolina Tax Regulation 50.5.A.1

[6] Sections 105-164.3, 105-164.4, 105-164.6, 105-164.14, and 105-264

[7] North Carolina Tax Regulation 50.5.A.2

[8] Sec. 105-164.14A (a)(4) G.S.

Thursday, October 20, 2011

Sales Taxes and Motorsports – An Overview

In the past, this blog has been exclusively focused on some of the issues affecting the motorsports community raised by the U.S. Federal income tax. It’s time to “shift gears” (pun intended) and discuss U.S. sales taxes.

In the U.S. sales taxes are levied by most states on retail sales. Many political sub-divisions of certain states – counties and cities – also impose sales taxes. The money collected by state and local governments from sales taxes forms a large part of their budgets, so it’s no wonder that the enforcement of sales tax laws is usually rigorous.

Sales tax laws tend to be “form driven,” that is, if the proper documentation isn’t present, a sales tax exemption won’t be given regardless of the law. As an example, if a store sells office supplies to a church, the sales tax would apply unless the office supply firm has an exemption certificate on file from the church. Although the state sales tax law may specifically exempt churches, no exemption is granted for any sale to that church from that office supply store unless the store has an exemption certificate from the church on file. If the state should conduct a sales tax audit of the office supply store, the store would have to pay the sales taxes due on merchandise sold to the church unless the store can produce a sales tax exemption certificate.

The type and amount of exemption varies from state to state. For example, many states have a sales tax exemption for manufacturing. But the definition of “manufacturing” and when manufacturing begins and ends can be (and often is) different from state to state.

Regarding motorsports: some states have sales tax exemptions for parts, fuels and lubricants used by racing teams. Specific state laws must be consulted for the exact definition of “motor sports.” and “racing teams.” In addition, the transaction dates must also be considered. Some states have enacted sales tax laws effective as of a certain date. Other jurisdictions are allowing motorsports-related tax exemptions to expire after a given date.

In the next few postings, I’ll review the sales tax exemptions for certain selected states as they relate to motorsports. If you want me to review a specific state, drop me a line.

* * * * *

Thanks for your patience in waiting for this post. I’ll try and continue to post monthly.

* * * * *

Contact me an email at phil.schurrer.racingprof@gmail.com if you or your group would be interested in a detailed presentation about this topic or other tax and financial aspects of motor sports. I'd also be interested in any comments you have about the blog or suggestions for future topics

Until next time …

Phil Schurrer, CPA

“This posting is intended to provide general information regarding the subject matter covered. It is provided with the understanding that the author is not engaged in rendering legal, accounting, or other professional services. This information should not be used as a substitute for professional advice in specific situations. If legal advice or other expert assistance is required, the services of a professional should be sought.”

- Adopted from a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers.

- Avoiding penalties under the Internal Revenue Code, or

- Promoting, marketing or recommending to another party any transaction or matter addressed therein.

Taxpayers should seek professional advice based on their particular circumstances.

Attorneys and other professionals dealing with specific matters and situations should also research original sources of authority.

Sunday, September 11, 2011

Different Types of Motor Sports Income

What do pro golfers and racing teams have in common? For one thing, the arena in which they work is extremely competitive. For another, both professions depend on endorsement and sponsorship money as a major source of funds

A Tax Court case[1] settled in June of this year demonstrates the ability of the IRS and the Federal Courts to specify the type of income that a taxpayer receives. And the type of income (or the way it’s “characterized,” in tax lingo) can have a major difference in how it’s taxed.

Let’s begin at the beginning. Retief Goosen is a professional golfer from South Africa and has played on the European tour for a number of years. In 2001, he won the U.S. Open tournament and played in the PGA. During the years 2002 and 2003, he was on the pro tour and received endorsement fees as well as bonuses, prize money, etc.

He signed agreements with various sponsors, including a watch company, clothing and golf equipment firms, and a video game producer. Some of these agreements required him to wear the sponsor’s clothing or use the golf equipment. The agreements also required him to make himself available for a certain number of days for photo shootings and public relations activities. Some of the agreements contained a clause that permitted the sponsors to void the agreement should he commit any action that violated public morality or decency. This seems to be part of a standard contract for sports figures.

His earnings were deposited in bank accounts at the direction of IMG, his representative. (IMG also has a major presence in motor sports.) His financial affairs were arranged in such a way as to minimize taxation, especially British taxation.

When the IRS audited Goosen’s tax return for 2002 and 2003, it raised the issue of what portion of his income was due to personal services and what part consisted of royalties. In his case, the tax treatment resulted in different tax liabilities.

One of the problems Goosen faced was that some of the endorsement agreements failed to allocate between personal services and royalties. There was also the matter of allocating a portion of his endorsement income to the United States.

Although he had some international tax issues that the average racing team doesn’t normally face, there are some similarities between Goosen’s tax problems and the tax problems of a racer or racing team when it comes to endorsements and royalties.

First, the IRS and the courts have the power to determine the type, or “character,” of income if either the endorsement agreement doesn’t specify the amount attributable to personal services, endorsements, royalties, etc., or if the allocation is unreasonable. The take-away for racers and racing teams is simple: make certain that any agreements of this type specify the amounts or percentages to be allocated to each type of income. If not, you could be taking your chances with the IRS.

Second, the allocation between US and non-US endorsement income was an important issue in the Goosen case. Although his specific issue is probably of little interest to the average racer or racing team (unless they compete internationally), the principle still holds on a smaller scale for motor sports.

If a racing team competes in different states or cities, it should be aware of the “jock tax.” If personal services, such as participated in a sporting event, e.g., a race, are performed in a particular taxing jurisdiction (state, county or city), that taxing locality can, and oftentimes will, have its hand out for its share of tax dollars.

Of course, if a racing team is going to be taxed on its revenue attributable to a specific locality, it should also be able to deduct a portion of its expenses attributable to that locality. Local law will govern and should be consulted.

Major League Baseball, the NFL, the NBA and the NHL are all very much aware of this. Many years ago, I helped prepare a tax return for a sports coach who, in one year coached in Minnesota, several cities in Michigan and in Pennsylvania. On top of it all, he was a Canadian citizen. At least eight tax returns were prepared for that particular year.

Third, another tax aspect of the Goosen case dealt with royalties. There’s a line of court cases holding that payments for the right to use the name or likeness of a person are considered royalties. Royalties are subject to income taxation, and may also be subject to self-employment tax if:

- The taxpayer is pursuing his or her trade or business in an unincorporated manner, and

- The taxpayer is “regularly engaged” in his or her trade or business.

So, if you’re “regularly engaged” in racing, not incorporated, and you receive royalties, you are probably subject to self-employment tax on the royalties.

(Self-employment tax is the social security and Medicare tax paid by taxpayers who conduct business without incorporation. For 2010 the rate is 15.3 percent of self-employment income. In 2011, the rate decreased to 13.3%. This tax is in addition to the income tax liability.)

What does “regularly engaged in a trade or business” mean? In 1968, the IRS issued a ruling[2] that gave an example:

If an individual writes only one book as a sideline and never revises it, he would not be considered to be “regularly engaged in an occupation or profession,” and his royalties would not be considered net earnings from self-employment. However, where an individual prepares new editions of the book from time to time, and writes other books and materials, such activities reflect the conduct of a trade or business, the earnings of which would be subject to self-employment tax.

The bottom lines for racers:

- If you receive endorsements, royalties and prize money, make sure the agreements are specific and the source of the income is well documented.

- Be mindful that the various cities and states in which you compete may also be interested in the revenues you earn.

- Be mindful of the self-employment tax.

There were quite a few issues involved in the Goosen care. In the final decision by the court, he won a few and lost a few.

Just like racing….

Until next time …

Phil Schurrer, CPA

- Adopted from a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers.

- Avoiding penalties under the Internal Revenue Code, or

- Promoting, marketing or recommending to another party any transaction or matter addressed therein.

[1] Retif Goosen v. Commissioner, 136 TC no.27

[2] Rev. Rul. 68-498

Sunday, August 21, 2011

Tax Treatment of Racing Crashes

At 7 am on the morning of May 30, 1941, George Barringer was putting gas into his car in a garage northwest of Indianapolis. It wasn’t just any car; the number 35 was painted on it. And it wasn’t just any garage; it was part of a complex of garages called “Gasoline Alley” at the Indianapolis Motor Speedway. Barringer’s car had qualified at 122.299 mph.

At the same moment, in the next garage last-minute preparations were also taking place. The Thorne Engineering crew was working on its entry, number 5, to be driven by Joel Thorne. Part of the final preparations included a bit of spot welding.

Gasoline fumes from Barringer’s garage drifted over into Thorne’s area and ignited. The resulting fire destroyed a number of wooden garages in Gasoline Alley. Fire officials, racing crews and others were pulling cars, equipment, fuel drums and anything else they could from the flames.

Viewing the remains of George Barrington's racer, May 1941. From left: Deacon Litz, George Barrington, Wilbur Shaw. Photo courtesy of IMS Photo Operations

What would be the tax effects if such an event occurred today? Before we answer that, we should get acquainted with some tax lingo – specifically the term “casualty.”

A “casualty” is defined as the damage or destruction of property due an identifiable event. This event must be sudden, unexpected or unusual.[1] Unless an event that results in damage or destruction of property meets this definition of a “casualty,” no deduction is normally allowed.

“Sudden” means swift and not gradual or progressive. The classic example of gradual damage is termite damage to a structure. From a racer’s standpoint, normal engine wear would probably be classified as gradual and not a casualty.

An “unexpected” event is ordinarily unanticipated or unintended.

An “unusual” event is one that’s not considered to be a day-to-day occurrence. It’s not typical of the activity in which you’re engaged.

Assuming your loss fits the definition of a “casualty,” the next step is to consider whether the property was owned by a corporation or individually. The ownership factor makes a great deal of difference in the tax treatment of casualty losses.

A casualty loss sustained by corporation is treated as a “sale of property.” If a corporation owns a racecar (or any other business asset) that’s damaged or destroyed, and the event qualifies as a “casualty loss,” then the adjusted basis of the item (cost less accumulated tax depreciation) is compared with the sales price of the asset after the loss. If the sales price is larger than the net book value, you normally have a taxable gain; if less, then a taxable loss results. If there’s no insurance recovery or the asset is scrapped, then the sale price is zero and a taxable loss can result.

The tax treatment is entirely different for property owned by an individual.

There’s a special rule for individually owned racecars damaged or destroyed in competition: there is no deductible loss because there’s no “casualty.” In a 1982 private letter ruling[2], the IRS stated, “in automobile races, crashes and collisions involving the participants’ automobiles are common. Such events are neither extraordinary nor nonrecurring…Without regard to whether the loss resulted from an event that was sudden and unexpected, the loss did not result from an event that was unusual.” Bottom line: you can’t get a casualty loss deduction for an individually owned racecar involved in a crash during a race.

If the asset is not an individually owned racecar damaged or destroyed in competition, individually owned property can be divided into two categories:

Business property, which includes property held for the production of income, and
Personal use property.

If business property is completely destroyed as a result of a casualty loss, the individual owning the property will follow the same rules as a corporation mentioned above.

However, if the business property owed by an individual is only partially destroyed due to a casualty loss, the loss is the lesser of the following items:

The adjusted basis of the property, or
The difference between the fair market value before and immediately after the casualty loss. In many cases, the cost of repairs is a good measure of this difference.

Any insurance recovery reduces the casualty loss, regardless of whether the property being owned by an individual or corporation. In some taxes (incredible as it may seem) a taxable gain could result from a casualty loss when insurance recovery is figured into the computations.

The distinction between business use property and personal use property for individuals also depends on the hobby loss rules, which were mentioned in earlier blogs. If there’s no profit motive in your racing activity, the individually owned racing equipment that suffered a casualty loss will probably be considered personal use property.

To compute the casualty loss on personal use assets, you would use the same rules as for computing the partially casualty loss on business use assets, There’s a limitation on casualty losses for personal use assets.The loss is only deductible if:

You itemize your deductions,
The loss is greater than 10% of your Adjusted Gross Income, and
You must subtract $100 from each loss prior to deduction.

Going back to the 1941 race, if today’s tax rules had been in effect and assuming George Barringer owned his car personally and his racing were considered an “activity for profit,” the destroyed race car would have qualified as a casualty loss of a business asset, since it wasn’t involved in a race at the time of the fire. However, if there were no fire and his car would have been raced that Memorial Day of 1941, any damage sustained during the race would be ineligible for a casualty loss deduction.

Interesting footnotes: Only 31 cars started in the 1941 Indy 500. George Barringer was awarded 32^nd place in the final race results and received $530 for his efforts. His car was the only one of the 33 entries that was damaged or destroyed in the fire. Sam Hanks, who would eventually win the 1957 race, was awarded the 33^rd spot in the 1941 race. Hanks didn’t even start the 500; his car was damaged in a practice session the day before. Joel Thorne’s car started the 1941 Indy 500 in the 23^rd position and crashed on the fifth lap in the first turn. He placed 31^st and was awarded $535.

Wilbur Shaw led for 107 laps but had an accident on lap 151 due to a blown tire. Days earlier, he was examining the tires he would use during the race. The tires he felt least comfortable with were marked “Use Last” in chalk. However, the water used by the fire department to extinguish the garage fire washed off his chalk instructions written on the tires. As a result, the less desirable tires were randomly placed with the others in his pit box prior to the start of the race.

Stuff happens…

Drop me an email at phil.schurrer.racingprof@gmail.com if you or your group would be interested in a detailed presentation about this topic or other tax and financial aspects of motor sports. I'd also be interested in any comments you have about the blog or suggestions for future topics

Until next time …

Phil Schurrer, CPA

“This posting is intended to provide general information regarding the subject matter covered. It is provided with the understanding that the author is not engaged in rendering legal, accounting, or other professional services. This information should not be used as a substitute for professional advice in specific situations. If legal advice or other expert assistance is required, the services of a professional should be sought.”
- Adopted from a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers.

Attorneys and other professionals dealing with specific matters and situations should also research original sources of authority.

[1] Rev. Rul. 72-592 1972-2 C.B. 101

[2] Ltr. Rul. 8227010

Wednesday, August 3, 2011

Valuation of Collector Cars - Lessons from the Dodge Daytona #71

In the past, I’ve commented about the importance of a well-documented valuation for donated collector cars. So now let’s turn our attention to probably one of the most famous stock cars ever to run on the NASCAR circuit – and the lessons to be learned from its valuation.

Introducing the Dodge Daytona # 71 - - -

Use of this photo courtesy of legendarycollectorcars.com

A little background about #71. It's a 1969 Dodge Charger Daytona with a 426 CID hemi engine. In 1969, Bobby Isaac, together with crew chief Harry Hyde (both NASCAR legends), won 17 out of 40 races with #71. In 1970 the feat was repeated, along with winning the Grand National championship (the forerunner of today’s Sprint Cup Series) and setting a world record of 199.653 mph for a stock car on a qualifying lap. #71 also held the record for the fastest lap around a closed course of 201.104 mph. After 1971 it also set several land speed records at the Bonneville Salt Flats in Utah.

There’s an interesting story associated with the life and times of this legendary racecar. And – yes – part of if involves a Tax Court case[1] that centered on the valuation of #71 when it was donated to the National Motor Sports Hall of Fame in 1977.

In 1957 Nord Krauskopf organized the K & K Insurance Agency, Inc. Its primary purpose was to sell auto racing insurance. Krauskopf had a background both as an insurance agent and a racing driver.

K & K became very successful, due in part that there were only two other firms engaged in selling this type of insurance at that time. One of K & K’s major accounts was the IHRA, and K & K insured over 700 tracks across the country.

In 1966 K & K began acquiring stock cars and started to compete on NASCAR’s Grand National Circuit. Initially, K & K competed in only 11 races each year, but by 1970, they were involved in 30 to 40 races annually. K & K hired a crew chief, racing crew (including mechanics and pitmen), and acquired a truck and trailer for transport purposes. Chrysler, Goodyear, STP, Monroe Shocks, Union 76, and Perfect Circle Piston Rings were some of the major sponsors who contributed both parts and money to K & Ks racing campaign. K & K also received money from toy companies that manufactured and sold kits for constructing a model of #71.

K & K became quite successful in stock car racing. Goodyear alone paid K & K between $40,000 and $120,000 for advertising. K & K placed in the top ten in points in seven of the ten years in which it was involved with racing. In 1970 K & K stood atop the leader board in points by virtue of #71’s performance.

In 1971 NASCAR changed the rules. It limited the size of the engines to 305 CID and mandated the use of a restrictor plate for large engines. So, after 1971, rather than selling the car to teams that were less successful or who raced in smaller, less prestigious circuits, K & K decided to keep # 71 because of its speed records and, perhaps, for sentimental reasons. In 1972 the car was not raced, but instead exhibited around the country on a “farewell tour.” After the tour, the car was partially dismantled and ultimately came to rest in an open, fenced lot behind K & K’s garage.

In 1973 K & K, together with its racing business and assets, merged with another insurance agency and Krauskopf received 50 percent ownership in the new company.

In June 1976, Krauskopf entered into an agreement with his partner to transfer all the racing assets from K & K to a new company, except for #71 (transferred to Krauskopf personally) and another car (transferred to Krauskopf’s partner.)

By this time, #71 was badly rusted, partially due to the salt from the Bonneville Salt Flats. The front fenders, trunk deck, and hood had been removed and the vehicle had been exposed to the weather for several years.

In the fall of 1977, the National Motor Sports Hall of Fame, near Talladega, Alabama contacted Krauskopf about contributing #71 as its first exhibition racecar. Krauskopf agreed and contacted Robert Gee about restoring #71. Gee had worked as a mechanic on #71 during the “glory” years of 1969 to 1971 when #71 was setting all its records. The restoration to original racing condition cost about $10,000 (How times have changed!) and in December 1977 Krauskopf donated #71 to the Hall of Fame.

At this point, the “tax tango” begins. Krauskopf took a charitable deduction for the car because the Hall of Fame is an organization qualified under the tax code to receive charitable contributions. (The donor receives a deduction on his or her tax return.) Krauskopf attached an appraisal by the curator of the Museum of Speed in Daytona Beach to his 1977 tax return, which stated that the value of #71 was $165,000. Krauskopf took a deduction of half that amount ($82,500) because the car was a long-term capital asset and, had it been sold, half of the value would have been taxable.

The IRS audited Krauskopf’s 1977 tax return. One of the main audit points was the deduction of $82,500, the value of #71 listed as a charitable deduction on the return.

Some background at this point would be helpful. The tax code allows a deduction for the “fair market value” of an item donated to an organization approved by the IRS to receive charitable contributions. Both the IRS and Krauskopf agreed that the Hall of Fame was such an organization. The big point of disagreement was the fair market value of #71.

The definition of “fair market value” for tax purposes is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts.”

The IRS contended that the value of #71 at the time of the donation was $35,000, which is the total of $25,000 (#71’s value when received by Krauskopf personally in June 1976), plus the $10,000 in restoration costs.

At the trial, the Museum of Speed’s curator did not testify, so the Tax Court did not consider his appraisal. But, testimony of M.H. Gould, better known as “Tiny” Gould, was given. In Gould’s opinion, the value of the car was $25,000 when it was distributed to Krauskopf by K & K in June 1976, and $150,000 when it was donated to the Hall of Fame in December 1977.

The IRS objected to Gould’s testimony because: he seemed to lack familiarity with #71; he would have found it difficult to find a buyer for the property; and he had never taken any formal courses in appraising.

Fortunately for Krauskopf, the Tax Court allowed Gould’s testimony. The Court noted that Mr. Gould was a former stock car driver and had a lot of experience in buying and selling collector cars. Over a twenty-seven year period, Gould had dealt with 30 to 35 racecars. He was a judge at numerous car shows and belonged to a number of car clubs as well as NASCAR. Based on the above, the court accepted Gould as a qualified appraiser.

Gould did not personally inspect #71, but studied photos of it and was aware of its records and background. He was also aware that the car was placed in a museum and would be viewed by at least 250,000 people annually, as opposed to being sold to an individual collector. It went on a nationwide tour and was given extensive radio and television coverage. Mr. Gould testified that the car had undergone a ground-up restoration and that he knew of no car that was comparable.

The Tax Court decided that the value of #71 for tax purposes was $100,000. We’ll never know why they chose a middle value between Gould’s assessment of $150,000 and the IRS’ valuation of $35,000. What we do understand, however, is the thought process the Tax Court used and the guidelines they employed in valuation of items such as racecars. These are the important lessons for motor sport fans from this case.

First, merely because there is a limited market for the property (in this case, #71) doesn’t mean it can’t be valued.
Second, merely because the property is unique doesn’t mean it can’t be valued.
Third, all relevant facts and circumstances need to be considered in the valuation process.
Fourth, the use of the property (in this case, exhibition at a museum) needs to be considered when valuing the property.

(We can only wonder why Krauskopf didn’t use the testimony of the curator of the Museum of Speed, the individual whose assessment letter of $165,000 was attached to Krauskopf’s tax return. Certainly two witnesses for the taxpayer would not have harmed Krauskopf’s case, even if their values were not identical.)

The lessons for any car collector or donor are clear. The competence and background of the appraiser is of great importance. In addition, the four principles of valuation mentioned above are valid and useful for anyone facing the challenge of determining the “fair market value” of collector cars – or anything else.

The fate of #71? Today it resides, restored to its former glory, at the Wellborn Muscle Car Museum in Alexander City, Alabama.

(My thanks to Richard Fleener of legendarycollectorcars.com for his assistance. Visit his website; I know you’ll find it interesting and informative.)

Until next time …

Phil Schurrer, CPA

- Adopted from a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers.

Attorneys and other professionals dealing with specific matters and situations should also research original sources of authority.

[1] Krauskopf, T.C. Memo 1984-386, 48 TCM 620