John Charles Geyer & Christin Teresa Wildfeuer v. Commissioner, T.C. Summary Opinion 2013-90
The Geyer case involved a couple who worked as travel guides for RV caravans. Mr. Geyer and Ms. Wildfeuer lost money in six out of seven years and deducted the losses from their other income. The I.R.S. alleged the work as a travel guide was actually a hobby. As a result, the I.R.S. used the hobby-loss provisions in the law to disallow the losses.
While people commonly use the term “hobby-loss” to describe these cases, the actual standard is whether a taxpayer possessed a “profit motive”. If the I.R.S. can demonstrate the business is “not engaged in for profit,” the tax losses become non-deductible. A taxpayer can, of course, use the losses to offset any income earned in the alleged hobby.
In Arizona and Nevada, the courts require a taxpayer to show the “predominant, primary or principal” objective in the business was to realize an economic profit independent of tax savings. Courts use nine factors in attempting to determine a taxpayer’s true intent in hobby-loss cases. These factors are: (1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer in carrying on the activity; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer’s history of income or loss with respect to the activity; (7) the amount of occasional profits, if any, which are earned by the taxpayer; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation. No single factor is conclusive, and courts give certain factors greater weight than others.
If the I.R.S. is auditing your business and alleging it is really a hobby, we can assist you in developing facts to show the I.R.S. that the blood, sweat and tears poured into your job is truly a business.