TaxProf Blog

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

Wednesday, April 2, 2014

Johnson: Reforming the § 183 Hobby Loss Rules

Tax Analysys Logo (2013)Calvin H. Johnson (Texas), Horse Losses and Other Pleasures, 142 Tax Notes 443 (Apr. 1, 2014):

Current law denies the deduction of losses from equestrian and other such activities if not undertaken for profit. The IRS wins almost all the contested cases, but the test is too indeterminate for the Service to enforce on a tax return.

The following proposal would defer the deduction of business losses until the claimed future income from the activity comes in. Loss deferral would apply automatically to activities specified by statute, including those associated with horses, dogs, airplanes, cars, and collectibles, and to activities from which significant participants derive recreation or pleasure. Deferral is limited to activities suppressed as a result of recreational value to encourage the general diversification of investments and to allow room for congressionally intended tax incentives.

Losses unabsorbed by future revenue or capital gain would be allowed when the taxpayer sells or abandons the activity, but only for expenses incurred when the activity had an expected positive present value. If the investment proves unjustified in hindsight, we should be skeptical that the expenditures were an investment, and we should allow the losses only at termination and only through a refund claim.

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What an obvious and good idea! Maybe it could be applied to new businesses more generally, with the additional proviso that if the new business never makes any money, the taxpayer can present evidence such as bank loans that the business was potentially profitable.

Posted by: Eric Rasmusen | Apr 2, 2014 1:29:38 PM