Originally published on Forbes.com.
Traveling the world going from one fine restaurant to the next searching for the perfect steak. It just doesn’t get any better than that or so it seems. But one thing that could make it better is doing it with tax-deductible dollars. That was what Maurice Dreicer did. And it worked for many years.
Finally, the IRS challenged his deductions asserting that his never finished book with the title My 27 Year Search for the Perfect Steak — Still Looking was an “activity not engaged in for profit”. The IRS was looking for about $30,000 in additional tax from Mr. Dreicer for 1972 and 1973. That would be over $150,000 in today’s dollars.
Most Colorful Hobby Loss Litigant
The Tax Court decision and the subsequent appeal to the DC Circuit, remain important precedents, but the case grabbed my attention because Mr. Drecer was so colorful. Colorful is a common attribute of Section 183 (so-called “hobby loss”) litigants, but as I have been combing through the cases in preparation for my upcoming seminar for the Boston Tax Institue, I have yet to find someone more colorful than Maurice Dreicer – Founder of The Order of the Golden Dozen (world’s leading chefs) and The Order of the Great Dining Establishments of the World, Special Gourmet Adviser to the Dinkier Hotel Chain, President of Cigar Smokers United and The Ale League of the World.
Background
According to obituaries in the New York Times and Sun Sentinel, Dreicer was born in New York in 1910 and graduated from Deerfield Academy and Rollins College. He attended law schools (Harvard, Pennsylvania, and Virginia), but there is no indication he ever practiced law.
Dreicer did quite a bit in the radio industry in the thirties and forties including a show called What’s It Worth, which was the inspiration for the TV show The Price Is Right
He recorded Here’s How To Mix Them, about the proper mixing of drinks. Here’s a sample. I think he sounds great.
He did manage to get one book published – The Diner’s Companion
Dining out is a fine art. To get the most enjoyment for your time and money, you need to know not only how to plan and where to go for fine food and drink in general, as well as for unusual specialties, but you must also know how to command attention, service, comfort complete satisfaction.
I suspect I have been doing it wrong all this time, but I am probably too old to change.
And His Day Job
I recently caught some flack from Going Concern for reflecting that tax accounting is actually a pretty soft job. As a matter of fact, I have trouble thinking of anything where the money is anywhere near as good that is not harder. There is one exception, that I forget to mention – trust fund beneficiary.
That was Dreicer’s main job in terms of income. That hurt him on the eighth factor in the standard Section 183 test (financial status of the taxpayer), but frankly, that one is often a gimme to the IRS, since you wouldn’t be there if you did not have other income being sheltered by the activity in question.
A Bit Of A You Know Artist
Dreicer’s routine when he went into a restaurant to challenge it to serve him a perfect steak had quite a bit of showmanship to it as is related in the Sun Sentinel obit.
Impeccably dressed in Savile Row suits, sporting a monocle, smoking a huge cigar and toting a black surgeon’s bag, he would enter a restaurant and began a routine that often was spectacular.
In a booming voice that commanded immediate attention, he would order a steak, then weigh it in its raw state to ensure it was exactly 1 1/2 pounds. He would question the waiter on how long the meat had been aged, peer at it through a magnifying glass to inspect the marbling caused by fat, then order it cooked over charcoal to 120 degrees ……..
….when the steak was placed before him, Mr. Dreicer would pull a thermometer from the bag and plunge it into the meat to test its temperature. He would then measure the steak’s saline content and inspect it a second time with a magnifying glass.
Then came the final test: He would pluck a golden butter knife from his bag and make the first cut. If it did not cut like butter, it was sent back.
As you can see, it was hard work and very scientific or at least seems that way if you turn off your bs detector.
And The Romance
In describing Dreicer’s efforts, Tax Court Judge Charles Simpson gets into the role of Brigitte Kimmich who, to use the language of another era was something of a Girl Friday to the enterprise:
The petitioner was assisted in his activities during the 1960s and 1970s by his secretary, Brigitte Kimmich. She kept a record of the petitioner’s daily expenses, took stenography, and typed his articles, business correspondence, and his manuscript. When the petitioner was gathering information on the restaurants and areas he visited, he dictated his impressions to Ms. Kimmich, who later transcribed them. Ms. Kimmich speaks English, French, and German and has a knowledge of Spanish; she served as the petitioner’s interpreter when he interviewed people in foreign countries, and she often assisted him in grading restaurants. She also acted as his driver whenever he needed to rent a car, since he does not drive. Ms. Kimmich worked fulltime for the petitioner, and she was on call all day. The petitioner paid her $100 per week for her services, and he paid for all her traveling expenses as well.
The decision came down in 1979, so I thought it was a nice touch to learn that Dreicer married Ms. Kimmich in 1984. He died in 1989 at the age of 78. I’m wondering if the plan was to have her be a trust beneficiary after he was gone.
How The Case Went
There are nine factors to consider, but the more cases I read, the more I am convinced that the first factor – “Manner in which the taxpayer carries on the activity” – is what makes or breaks you. The judges seem to often fudge the other factors to make them fit the overall narrative they have selected.
There are three subfactors to the first factor. One is keeping good records. Then comes behaving like other people who make money in the chosen field. And the third is modifying your plan based on experience. Rather than making the same mistakes over and over, it is better to keep making new mistakes.
Judge Simpson did not do a full drill on the factors but wrote more holistically. Basically, he thought that Dreicer was having a good time traveling around the world and had no realistic expectation of ever making serious money doing what he was doing.
Although the petitioner spent a fair amount of time traveling around the world in his endeavors, we are not convinced that such activity is anything more than his lifestyle, a lifestyle to be envied by those who do not have independent income to sustain it.
The Appeal
The Second Circuit did have an issue with Judge Simpson’s opinion, which is what makes this case an important precedent. It is a subtle point.
We hold that a taxpayer engages in an activity for profit, within the meaning of Section 183 and the implementing regulations, when profit is actually and honestly his objective though the prospect of achieving it may seem dim.
Section 183 was relatively new at this point, a provision of the Tax Reform Act of 1969. The Second Circuit dug into the legislative history and found that Congress was requiring that you have an “honest objective” of making a profit rather than a “reasonable expectation”
By thus hinging its decision on Dreicer’s profit expectations instead of his profit objectives, the Tax Court utilized the wrong test. The statute, its legislative history and the implementing Treasury regulation make explicit that the objective, not the expectation, of making a profit is to govern determinations on whether a taxpayer is engaged in a business or a hobby, and the two criteria are not the same. One may embark upon a venture for the sincere purpose of eventually reaping a profit but in the belief that the probability of financial success is small or even remote. He therefore does not really expect a profit, but nonetheless is willing to take the gamble.
The decision sent the case back to Judge Simpson. It was no help to Dreicer who still lost even under the more generous standard.
A Practical Takeaway
I have not taken my study of 183 case law far enough to compile reliable statistics. Superficially it seems that taxpayers lose these cases more often than they win. Of course, actual Tax Court decisions are a bad sample of outcomes, since the IRS might give up based on hazards of litigation and settle cases that are more marginal only fighting the ones where people are being stubborn.
Putting the sampling problem aside, are the losers actually losers? At some point, they decided that something that they wanted to do could be characterized as a business. Eventually, the IRS came in and said “No. That’s not a business, we are disallowing losses for the last two or three years.” and the Tax Court agreed. If that disallowance happens after twenty, ten or even five years of allowed losses, the taxpayer has still come out ahead on the decision to treat the activity as a business.
So if your client tells you about some preposterous scheme, but you think they are sincere, if deluded, don’t be so quick to tell them not to claim the losses. Coach them to keep good books and document their fantasies and keep revising their plans. If and when the audit comes, bring a nice ticked and tied set of schedules along with regularly revised business plans. Go ahead and agree with the Revenue Agent, one accountant to another, that maybe the scheme is a little crazy, but insist that does not matter.
Other Coverage
Julian Block went into the Dreicer decision at some length in How Not to Get Too ‘Creative’ with Hobby-Related Tax Deductions. Julian is implicitly sounding the cautionary note that scares people away from claiming deductions.
I found a reference to Dreicer in Pittsburgh Drinks: A History of Cocktails, Nightlife & Bartending Tradition by Cody McDevitt and Sean Enright in which Dreicer relates that he used to start the day with a double bourbon, a beer and two hard-boiled eggs but he had to give it up because the eggs did not agree with him. Dreicer sympathized with the steelworkers of Pittsburgh who did not have the leisure to spend as much time drinking as he did.
Dana Goodyear devotes some attention to Dreicer in Anything That Moves including mention of the tax case. Goodyear fills in a detail indicating that Dreicer was heir to a jewelry fortune. Anna Rasche has a paper on the Dreicer jewelry store that was prestigious in New York up till the nineteen-twenties, but I have not nailed down the connection.
It is nice to see that Dreicer is still remembered. I remember hearing him interviewed on WOR by Barry Farber, who used to come on after Jean Shepherd. One of the things he mentioned was that it was important that the steer had lived a happy peaceful life until having the tastiest part of it on the plate in front of Dreicer. His story evokes another era when the wealthy were viewed as a bit frivolous rather than “the makers”.
Update
I heard from Anna Rasche. She clarified that he was not “the heir”, but likely one of several.
Maurice is the grandson of Jacob & Gittel Dreicer, who founded the earliest iteration of the jewelry company, Dreicer & Co., c. 1868.
Jacob & Gittel had four children — Fannie, Michael, Regina & Mary. Maurice is the son of Regina and her first husband, Maurice C. Sternbach. Regina’s second husband, Jospeh Stroock, was a well-to-do businessman and philanthropist in his own right.
The jewelry company was liquidated while Maurice was still a teenager (1927), and his mother, Regina was indeed one of the beneficiaries.
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