Originally published on Forbes.com. Nov 25th, 2014
The Tax Court decision in the case of Willam D. Evans had the look of a hobby loss case, which was kind of neat coming on top of a really good horse case. Well, it was about racing – motorcycles not horses – but it was not a hobby loss case. Ever since I showed my utter ignorance of the sport, if you can call it that, of dressage, prematurely calling Mitt Romney’s dancing horse Rafalca out of the Olympics, I get nervous when I encounter a tax case about a sport that I am totally unfamiliar with. Such is the case with motocross racing. According to the infallible source
Motocross is a form of off-road motorcycle racing held on enclosed off-road circuits. The sport evolved from motorcycle trials competitions held in the United Kingdom. Motocross is a physically demanding sport held in all-weather conditions.
Apparently just staying on the motorcycle for the entire race is something of a triumph.
At any rate, my knowledge of the sport is so abysmal that my fingers keep wanting to type “motorcross”. Apparently, like similar activities I have encountered in tax cases – sprint racing, drag racing, even people racing involving no vehicles or animals – corporate sponsorship is the lifeblood of the sport. Here is a website that allows you to search for corporate sponsors if you are involved in the sport. Motocross racers are cautioned to keep in mind that sponsors are interested in promoting their business, not just love of the sport.
The absolute most important rule to remember for anyone attempting to secure sponsorship is this: find ways to show the company how you can promote their product. So many riders only look at their side of the equation and focus on the help that they need. However, sponsors are not doing this for charity. As a man smarter than me once said, “Companies are only in the sponsorship business to increase sales. Show a company how you can sell their product and they will bend over backwards to help you in return.” Approaching sponsorship as a business plan is the single most important aspect of dealing with any company in motocross.
Mr. Evans’s company Dave Evans Construction was a motocross racing corporate sponsor. The issue in the case was whether the sponsorship expenses were ordinary and necessary business expenses. The IRS was skeptical about that because the rider being sponsored was Ben Evans, whose shared surname was in no way coincidental, Ben being the son of Mr. Evans. Here are some highlights.
Ben was born in 1990. He first started motocross racing when he was six years old and quickly demonstrated that he had a special talent. While his siblings competed only in local races, at the age of seven Ben competed in a nationally televised race at the Seattle Kingdome. As a teenager he competed on the national amateur circuit and in 2007 won the Amateur Motocross National Championship 458 Pro Sport class at the Loretta Lynn 4 Motocross Ranch (Loretta Lynn) in Nashville, Tennessee
Ben’s racing career took off in 2005.
He competed in nationally televised races and was featured in various motocross magazines, including Amateur MX Magazine and Racer X Magazine. Sponsors, including American Honda, Carl’s Cycle Sales, Western Power Sports, and Step One Graphics, started “coming out of the woodwork” to support him. At this point Mr. Evans realized that his son’s talent and “star power” might help to boost DEC’s business. He consulted with his certified professional accountant (C.P.A.), Bill Anderson, who advised him that supporting Ben’s motocross racing could be a valid promotional activity for DEC. DEC subsequently became one of Ben’s sponsors.
Between 2006 and 2007 DEC put over $150,000 into motocross expenditures – mostly payments for motorcycles, parts, equipment, racing fees, membership fees, fuel, and food. There was just over $40,000 in offsetting income – mainly the sale of motorcycle parts.
There were benefits to the company from the sponsorship.
Boise’s construction industry was particularly competitive during the years in issue, but sponsoring Ben helped give DEC an advantage over its competitors. ] Throughout Boise, Ben was well known as a motocross racer. Because many of DEC’s jobs came through word of mouth, its relationship with the local community played an important role in driving business. DEC’s association with Ben thus played an important role in boosting DEC’s exposure and goodwill within the community.
In addition to improving DEC’s community relations and attracting more clients, Ben’s celebrity status also helped DEC attract investors, such as Carl’s Cycle Sales, for its projects. DEC’s connection to Ben also helped it secure a major source of financing: Len Williams, the president of Home Federal Bank, first met Mr. Evans at a motocross race when he asked for Ben’s autograph; his bank is now DEC’s largest construction lender. DEC’s connection to Ben also helped it to strengthen its relationships with local subcontractors, thus giving it an advantage over its competitors in securing the best local subcontractors for its projects and occasionally getting discounted rates.
The IRS argued that the sponsorship of Ben was a personal expense, but the Tax Court was having none of it, pointing out that all five children had been supported in their motorcycle pursuits, but only Ben, who had already achieved some national prominence, was sponsored. The IRS also argued that supporting Ben in races outside the company’s business area was of no benefit, but the Tax Court did not buy that argument either.
Moreover, Ben’s increasing national stature—fueled by his participation in races on the national circuit—served to improve his fame and name recognition locally. Many of DEC’s customers and business partners were fans of motocross racing, and petitioners have established that its association with a rising star in motocross racing helped DEC generally to gain new business connections and to strengthen existing ones. Petitioners have also established that these connections helped DEC’s business in more specific ways. For example Home Federal Bank is now DEC’s largest source of commercial funds, Carl’s Cycle Sales has invested in several of DEC’s projects, and at least one subcontractor has given DEC discounted rates for its services.
This case probably does not provide a road map to hide hobby losses through a sponsorship, since DEC was not the sole sponsor and Ben had achieved some prominence before the sponsorship. Although it is not a hobby loss case, it reminds me a bit of the Susan Crile decision, where the IRS discounted Ms. Crile’s prominence as an artist in deciding to go after her on Section 183. Here they seemed to have ignored Ben Evans’s success on the track prior to the sponsorship.
Personally, the fact that somebody had a son who was real good at motorcycle racing would not influence me to favor his construction company, but that’s just me.
The case has not attracted much notice, except of course from Lew Taishoff, who is nothing if not thorough. Tony Nitti also covered the case on forbes.com.
Here are a couple of videos of Ben.