40 Years of Losses, but Still Motivated to Profit

Applying the Results of a Recent Tax Court Decision

John K. Cook, JD, LLM, and Sarah Webber, JD, LLM, CPA

Many taxpayers have a hobby or sideline that they pursue in the hope of earning additional income. In calculating their profits from this “business,” taxpayers are allowed by IRC section 183 to deduct expenses as long as the expenses are not categorized as “personal.” In one recent case, the Tax Court analyzed the taxpayer's returns for several years and determined that she was in the business of being an artist and could deduct related expenses, even though she made a profit from her art in only one of 42 years. The authors disagree with the Tax Court's reasoning and explain why, as well as provide advice for tax professionals facing similar situations.