Note: The
following is an excerpt from the introduction to the article
as published in The Tax Lawyer. Author citations
have been omitted for brevity. Tax Section members may read
the article in its entirety in Adobe
Acrobat format.
INTRODUCTION
MAKING YOUR BUSINESS FLY ABOVE SECTION 183:
FAIR SKIES FOLLOWING RABINOWITZ V. COMMISSIONER INTRODUCTION
So-called “hobby-loss” cases have long created confusion for taxpayers and
tax-planners alike. Though taxpayers attempt to carefully structure certain activities
to avoid the hobby-loss restrictions of section 183, the Service frequently
and often unpredictably disallows losses attributable to such activities.1 In
Rabinowitz v. Commissioner, taxpayers recently challenged the Service in the
U.S. Tax Court for disallowance of loss deductions connected to the taxpayers’
jet charter company as a not-for-profit activity.2 The court held in favor of the
taxpayers, finding that the loss deductions were attributable to a for-profit activity
within the meaning of section 183 and related regulations. In reaching the
decision, the court mechanically applied the nine nonexclusive factors prescribed
by section 1.183-2(b).3 The court found the taxpayers’ general business acumen
and “reliable and credible” testimony, among other considerations, to be outcome
determinative.4
As a successful challenge to the Service’s disallowance, Rabinowitz serves as
a model for satisfying the factors under section 183 and adds to the existing case
law and commentary on section 183 hobby-loss determinations. This Note analyzes
the facts and circumstances that led to the court’s favorable (and relatively
rare) finding of for-profit activity based on the nonexclusive factors enumerated
in Regulation section 1.183-2(b). Part I briefly summarizes the facts of Rabinowitz
and lays out the statutory framework of section 183. Part II examines the regulations
and their application to the Rabinowitz facts and extracts the teachings of
the case to provide a useful framework for future taxpayers seeking to avoid the
effects of section 183. |
