Ensuring Business Activity Classification

Lessons from the Tax Court's Decision in Whatley

John K. Cook, JD, LLM, and Kathryn Easterday, PhD, and Sarah Webber, JD, LLM, CPA

In BriefIndividuals often contend that their hobbies have a profit motive in order to obtain a more favorable tax outcome. But when such disputes reach Tax Court, the IRS often prevails. With hobby expenses generally non-deductible under the Tax Cuts and Jobs Act, the stakes have become even higher in recent years. The authors take a close look at one recent case and review the relevant regulatory factors; their analysis indicates a taxpayer's chances of prevailing in court and suggests effective planning, documentation, and legal strategies.