A Racer in Tax Court

In the previous post, I outlined some general rules regarding the tax treatment of "hobby" losses. In this post, you'll see how these rules affected Rod and Joan Barton of Frewsburg, New York.

Rod began to take an interest in racing in the 1950’s when he began building stock cars. He dropped out of racing for several years due to business commitments and the demands of raising a family.

However, in 1968, he began to race competitively in the modified sportsman class. He soon realized that he would need a different car (costing about $15,000) to compete nationally, but he never did acquire that vehicle. His tax records showed that in 1974, he owned a racecar that cost $3,000 and the next year, he purchased another racecar for $4,200.

Rod raced primarily at two dirt tracks: one in New York and the other in Pennsylvania. The season lasted from the first weekend in May until Labor Day.

About 22 races were held at each track, on Saturdays and Sundays.  First prize was $300. No one ever won more than half the races in any season. During these years, Rod held a NASCAR license.

In 1976, Rod raced at Daytona and finished 47 out of 50.

Between 1970 and 1976 he showed losses for his racing activity on his tax returns, ranging from $822 to $6,689. His maximum winnings in any single year amounted to $2,075 in 1976.

He kept a few receipts, but had no separate bank account for the racing activity. He had two assistants; one worked without pay and the other shared in any winnings.

Rod also had an electrical contracting business at which he spent 50 hours per week. This was the source of livelihood for him and his family.

The IRS audited his return for 1975 and assessed additional taxes of $2,092. Rod and Joan disagreed with the IRS, and took their case before the U.S. Tax Court in 1980. Rod represented himself in the hearing.

The court found no profit motive in the racing activity because:

• There was a consistent history of losses and the losses kept increasing. There was no reasonable way to recoup his losses by winnings at local racecourses.
• With one exception, Rod did not participate in any national races where the purses were larger.
• Rod (perhaps unwisely) testified that he got great personal pleasure from racing. The court noted that, although an activity can have elements of pleasure as well as business aspects to it, the presence of enjoyment could be used in determining whether or not the activity had a profit motive.
• He did not conduct his racing in a businesslike manner. Rod kept no records of the trucks used in the racing activity and he had no separate bank account for his racing.

Bottom line: Rod Barton could not deduct his racing losses on his tax return because his racing lacked a “profit motive.”  

Until next time...

Phil Schurrer

Contact me at: phil.schurrer.racingprof@gmail.com

(The legal citation for this case is: Barton, 40 TCM 382, TCM 1980-179)

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