Doyle v. IRS
TC Memo 1982-694
Summary of Case
Hobby losses can be deductible in spite of many years of losses.
Many of us have hobbies from which we derive great pleasure. It’s a respite from the hard work that we do during the day and it allows us to spend time with our families, often in some kind of recreational pursuit. These hobbies are varied and may include horse racing, competitive golf, yacht rentals, airplanes, car racing and many other activities.
George Doyle, a married father of three, purchased three American Quarter Horse Association horses and showed them all over the country in an effort to raise their value and sell them at a profit. However, he failed, and decided to try breeding them instead.
The Internal Revenue Service alleged that no one could reasonably expect a profit after 11 consecutive years of losses. This was compounded by the fact that Mr. Doyle conceded a fraud penalty on some other dealings in the same years. Therefore, the IRS discounted his credibility, and refused to allow him to deduct expenses for his horses.
The case is interesting because it goes into great detail about the hardships this family endured in an unsuccessful effort to make this a profitable business.
Typically, expenses that are incurred for hobbies are not deductible. However, the Internal Revenue Code allows us to deduct these expenses if we intend to make a profit. The test is simple: Do we really intend to make that profit? That intention need not be reasonable, only genuine. The code contains a variety of factors to test the genuineness of that intention. They include:
(1) the manner in which the taxpayer carried on the activity;
(2) the expertise of the taxpayer or his advisors;
(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 profit, if any, which is earned;
(8) the financial status of the taxpayer; and
(9) whether elements of personal pleasure or recreation are involved.
Again, the overriding concern is whether the testimony indicating a taxpayer’s intent to make a profit is credible.
4. Decision of the Court
The United States Tax Court examined the credibility of the witnesses and the objective criteria to determine whether Doyle truly intended to make a profit. The Court held that, in spite of 11 years of consecutive losses, he truly intended to make a profit. The decision allowed him to deduct these expenses.
5. Impact of Case
The case made the front page of the Wall Street Journal, and stands for the proposition that hobby losses can be deductible even if the intent to make a profit may appear to be unreasonable, and even if there has been 11 consecutive years of losses.
Congress subsequently passed laws allowing for longer periods of allowable losses to be incurred.