Originally published on Forbes.com. Dec 4th, 2012
Hobby loss cases. I just love them. And it looks like I am becoming known for them. The case of John Sernett was decided yesterday and two people have written me about it – fellow Forbes contributor, Tony Nitti and my number one commenter, bane of the basketball ministers, Robert Baty. It’s a pretty good one. Mr. Sernett was involved in sprint racing. Sprint racing is a form of car racing. I’m going to leave it at that. Ever since I embarrassed myself with my abysmal research on dressage, which caused me to call Rafalca, Romney’s Olympic dancing horse, out early, I am cautious about sports commentary working its way into my hobby loss posts. I think I did OK on Ryan Bailey, but I will not push my luck.
It’s funny. I am not much of a sports fan, but I really like “feel good” sports movies. Nothing better than a feel good sports movie that is also a chick flick – like For Love of The Game
What do feel-good sports movies have to do with Section 183 of Title 26 of the United States Code and the related regulations, commonly referred to as the “hobby loss” rules? If the hobby can be considered a sport or is sport-related, there is a connection. The way to succeed in a hobby loss case is to play the bad guy in the feel-good sports movie. If you are in it for the love of the game and you lose money, you also lose in Tax Court.
The Tax Court decision in the case of John Parks, Olympic sprinter Ryan Bailey’s coach, has a feel-good sports movie embedded in it. I think the title would be “Run For Your Life”. It’s a classic poor kid rescued by sports narrative like The Blind Side
In order to win in Tax Court, though, Mr. Parks had to ruin the movie narrative.
In 2009 petitioner became Bailey’s professional coach and manager and entered into a contract with Bailey which entitled petitioner to $5,000 for 2009 and $10,000 in subsequent years, plus a percentage of any bonus that Nike agreed to pay Bailey. As a result, petitioner’s reputation and the quality of athletes he coached improved and continued to improve through the time of trial. As of the time of trial, petitioner had acquired a contract with Nike which will enhance his reputation and success as a track coach even further.
By the way, Ryan Bailey does his sprinting without a car. He needs the right kind of shoes, which accounts for the Nike contract.
John Sernett gave it his best shot in Tax Court indicating that even though he lost over $600,000 in the first decade of the new millennium, including over $100,000 in the audit years of 2005 to 2007, he was really in it for the money.
Petitioner contends that he no longer enjoys racing as he once did and that he raced solely for profit during the years in issue. Respondent contends that the record shows that petitioner’s lifelong involvement in sprint car racing is motivated, not by a desire to make a profit, but by his love of the sport. Petitioner testified that maintaining his cars has become a chore and that “the thrill is basically gone”. Petitioner further testified that he continues racing because “it makes me money”.
The Tax Court just did not believe him.
His other problem, which is common in hobby loss cases was not having a business plan. Also, they gave him good marks for keeping thorough records, but they saw the goal of his record-keeping to be focused on substantiation of tax deductions rather than on getting good information to correct his business plan. This is a pretty common criticism of people who lose hobby loss cases. What you are supposed to do is alter your behavior if you are losing money. If you keep on making the same mistakes and losing, you were not really trying and will lose in Tax Court. If you keep on making new mistakes, then maybe you have a chance.
Although they have not racked up the truly impressive record of Amway IBOs for losing in Tax Court, people who race cars have not done too well lately in hobby loss cases. If you are involved in car racing and showing consistent losses, start working on your business plan. And if they take a picture of you behind the wheel, make sure you are not smiling.
You can follow me on twitter @peterreillycpa.
Afternote:
A feel-good sports movie that is also a chick flick is great for date night. Another pretty good one is Trouble With The Curve