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Originally published on Forbes.com Oct 27th, 2012

In the summer of 2008 a gifted athlete named Ryan Bailey, whom petitioner(John Dalton Parks III) had begun coaching in 2006, became a qualifier for the Olympic trials in Eugene, Oregon. Bailey ran the sixth-fastest time for an American runner in the 100 meters, and his race times indicated that he was one of the world’s fastest runners in the 100- and 200-meter distances.

Don’t worry I have not switched to sports coverage.  After how poorly I did with Rafalca, the Romney dancing horse, I wouldn’t think of it.  This is about a recent Tax Court decision.  John Dalton Parks III, who has coached Ryan Bailey, was the one in Tax Court.  According to this story, Ryan Bailey, a former gang member, was drawn into track by Mr. Parks.  Here is Ryan Bailey in a recent race in Stockholm

Frankly, I don’t follow sports very much, so I first learned about Ryan Bailey from reading the Tax Court decision about his coach.  Even before, I looked up a little more about him I was puzzled as to why the IRS was pursuing this case.   Now, I am mystified.

Hobby loss cases. I just love them. Code Section 183 concerns activities not entered into for profit, which is broader than “hobby loss”. You see all sorts of things that people say they were trying to make money on. My favorite was the couple that was playing slots using the principles of feng shui (They won). Over the years there have been a string of Amway cases (They almost all lost). Based on an unscientific impression the biggest source of hobby loss cases is businesses involving horses. Of course the most famous horse hobby loss is Rafalca, Romney’s Olympic dancing horse.  On the Romney 2011 return, they conceded hobby loss treatment. The recent Tax Court decision in the case of John Dalton Parks, III was a new one on me. Mr. Parks was not in the business of getting horses to run faster. He was all about getting people to run faster. My first thought was that I had never heard of such a thing as an independent track and field coach. Then I remembered Sam Mussabini

Mr. Parks did post over $150,000 in losses over a nine year period with nearly $100,000 of them being in the audit years 2006-2008.  By 2011, he was breaking even though and he had Ryan Bailey under his wing along with a contract with Nike.  He did all of the other right stuff to win one of these cases most importantly:

In October 2006 petitioner consulted with Loren Seagrave concerning ways to increase the profitability of his private coaching activity. Seagrave is recognized as an expert in sprint and power development and coaches several Olympic and world champion track athletes. Petitioner paid Seagrave for his advice, which was to speak at more regional and national clinics, training camps, and universities. He also advised petitioner to advertise and develop opportunities to enter the professional track ranks by showcasing the abilities of his most gifted runners.

This is probably the key thing that differentiates winners from losers in hobby loss cases.  Mr. Parks did not just seek expert advice about helping people to run faster.  He sought expert advice about how to make money helping people to run faster.

The only reason that this is not a really good case to study is that it is screamingly obvious that the IRS should not have brought it.  It would be nice to read of a follow-up in which Mr.  Parks wins attorney fees, but I doubt that he qualifies.

You can follow me on twitter @peterreillycpa.