TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, June 23, 2010

Tax Court Says Fisherman's Claimed Losses Were Bass-Ackwards

Dow Jones, Fish Tale Fails To Impress Tax Court, by Arden Dale:

The angler called them professional losses. The IRS tossed them back. Now, a U.S. Tax Court judge isn't biting, either. The judge this week upheld an IRS decision that a taxpayer's efforts to write off around $166,000 in losses from bass tournaments was just a fish story.  [Lowe v. Commissioner, T.C. Memo. 2010-129 (June 14, 2010).]

The man, married to the controller of a company and unemployed for a decade before he started reporting income and expenses from fishing, said he was a professional fisherman and claimed the losses over four years.

The case "gives new meaning to the phrase 'tax chutzpah,'" according to Paul L. Caron, a law professor at University of Cincinnati College of Law and editor of the popular TaxProf Blog.

Taxpayers often try to pass off hobbies as business to get the tax benefits. The bass-fishing case and others like it turn on deciding what is a hobby versus a professional business. Section 183 of the tax code, also known as the "hobby loss rule," limits the amount of losses that can be deducted from income on hobbies and other not-for-profit activities.

In the bass case, Steve Lacy Lowe, the angler, listed Professional Fishing on his Schedules C from 2003 through 2006. ...  In 2005, he fished in 26 tournaments and reported gross income of $4,241. The next year, he fished in 15 tournaments and reported $10,932 of gross income. ...His wife [was] a professional bookkeeper who earned an average of $180,000 a year from her job during the years at issue.

From the court's opinion:

Additionally we find that Mr. Lowe's competitive strategy was not fully consistent with an intent to make a profit. ...  All of the American Bass tournaments in which Mr. Lowe fished were team tournaments. Mr. Lowe would enter Mrs. Lowe as his partner and then fish the tournaments alone. This practice, while allowing him to share the activity with his spouse, doubled Mr. Lowe's entry fee. We assume that had he fished with a fishing partner, the partner would have paid his or her own share of the entry fee. By fishing alone, Mr. Lowe also at least halved and most likely much more than halved his chances of winning. Mr. Lowe, against very stiff competition, would have had to catch more fish, alone, than any of his competitors could catch with both competitors fishing, in order to win a tournament. We do not find this conduct consistent with the intent to make a profit. If Mr. Lowe had been truly engaged in the bass fishing activity for profit, he would have done everything in his power to increase his chances of winning and decrease his entry costs. We do note that under this strategy, had Mr. Lowe won, he would not have had to split the prize. Unfortunately, when you do not win, that does not matter. With such a large handicap we believe winning would have been extraordinarily difficult and extremely improbable.

This finally gives me a chance to show what adorned the living room wall in my late father's lake house:

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The IRS was on a fishing expedition.

On the court's judgment, if they disallowed expenses because a businessman was doing something stupid or inconsistent with maximizing profits, then we'd all be in trouble.

Posted by: Woody | Jun 23, 2010 6:13:58 PM

Heh. Woody does have a point. I've met too many people in small business to argue the maximize profit theory doesn't always apply.

On the other hand, it really does sound like a guy who liked to fish a little too much looking for a justification for a rather priced hobby. (I'm thinking mostly to his wife - ouch - over $166K lost. If I was married to the guy we would have had a "talk" way, way before reaching that threshold of lost money. *grin*)

Posted by: Amy | Jun 24, 2010 5:36:47 AM