Originally published on Forbes.com.
I like it when a taxpayer wins while representing himself in Tax Court – even if he is an attorney. Richard Brewster Main is a patent attorney and had a business that involved “creating prototypes, inventing electronics and filing patent applications”. He also had a car business focusing on a real specific type of car – 1955 and 1956 Plymouths.
Plymouths From The Fifties – A Thing If Not A Big Thing
If you follow this link and scroll down you can see some pictures of the Golden Fin Society meeting at Richard Main’s Plymouth Ranch in Livermore CA for the third national gathering in 2002. The California Chrysler Products Club visited in 2001 (In the small world department they had visited a display put on by the Horseless Carriage Club of America on the same day. HCCA has also been featured on this blog.)
Or A Profitable Thing
As it worked out 2009 was not a banner year for either the invention or the Plymouth business. Mr. Main’s 2009 Form 1040, which was filed pretty late, reported zero income tax and $3,049 in self-employment tax. There are not specific numbers in the decision, but apparently the loss from the Plymouth business was sheltering other income to some extent. The IRS took the position that Mr. Main was not really trying to make money on the cars.
The decision is pretty short but it is instructive. It shows that the Tax Court is continuing to relax on its obsession with formal business plans.
Petitioner undoubtedly enjoyed working with Plymouths. Although his manner of carrying on this activity was unsophisticated, it was businesslike. He had experience operating a businessand expertise relating to Plymouths; advertised online, in print, and at live events; traveled outside California to acquire cars at bargain prices; contracted with third parties to manufacture parts for him to resell and use in restorations; and abandoned unprofitable aspects of his automobile activity (i.e., he downsized his inventory and stopped contracting for manufactured parts). . Furthermore, he devoted considerable time to, and handled all material aspects of, his automobile activity.Lastly, petitioner’s patent business was undergoing a downturn during the year in issue, and petitioner, a prudent businessman, would not have squandered his hard-earned money on an expensive hobby. In short, petitioner’s automobile activity was a business, and his primary objective was to make a profit. (Specific references to Reg 1.183-2 omitted)
Not A Total Win
The critical element, in my view, is adjusting your behavior as you see that things are not working. You will see people who win horse cases on the same grounds. Amway Independent Business Owners on the other hand always seem to keep on keeping on in the face of persistent losses.
Mr. Main did not avoid the common problem of attorneys in Tax Court. He lost some of his deduction for lack of substantiation. That was the story of the great F. Lee Bailey, who is now filing for bankruptcy. He won against the IRS on a highly technical issue and split with them on hobby loss, but got absolutely killed when it came to substantiation. Mr. Main, on the other hand, seems to have only given a bit on that issue.
Other Coverage
Lew Taishoff covered the case. His post was titled Sheer Magic . Lew’s title is a reference to a Plymouth commercial from 1955.
He seems to think the key to the decision was that Mr. Main did not have that much going on when it came to other income.
Takeaway: Hobbyist, use the checklist, but remember: lots of other income is a tough fence to jump.
Unremarked Anniversary
Somehow I managed to let my fifth anniversary of my start as a Forbes contributor go unremarked. I was thinking of doing a retrospective of the several long-running stories that I have covered. That first post was about marriage equality which seems to be pretty much over as a tax controversy, although something did crop up last month. Since blogging about your own blog is the height of self-absorption, I’ll leave it at that.