Potential Perils Associated with a “Hobby Loss” Case

I read an interesting article on the potential perils associated with a “hobby loss” case. Hobby loss, refers to the IRS’ denial of business loss deductions based on IRC § 183, activities not entered into for profit. The IRS refers to these “activities not entered into for profit” as hobbies. The article discusses a recent Tax Court decision involving Bill Romanowski, former NFL player, and highlights several potential pitfalls associated with “hobby loss” cases. Although, as the author accurately points out, the Romanowski case is more akin to a tax shelter gone wrong than a true “hobby loss case.” The case involved the IRS challenging losses Romanowski took on his income tax return associated with a purported horse breeding business that he was an investor in. There have been many cases challenged by the IRS involving horse breeding businesses. The IRS has on many occasions taken the position that similar operations are a hobby and not a business entered into for the purpose of making a profit. The Romanowski case is a cautionary tale of the potential pitfalls of thinly masking tax shelters and a business entered into for profit. As the author, Peter J. Reilly, points out, it seems “odd that somebody who was going to promote a tax shelter would uses horses, since the business already has red flags associated with it. I keep a rough tally in my head of what activities are most likely to win hobby loss cases. Car racing and Amway do not do well at all. Horse breeders, on the other hand, frequently win, although the IRS keeps going after them.” You can read the full article here.

Shad Brown, Attorney

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