Doyle v. IRS

TC Memo 1982-694

Summary of Case

Hobby losses can be deductible in spite of many years of losses.

This case also made the front page of the Wall Street Journal.

1. Introduction

Many of us have hobbies that we enjoy and take great pleasure from. 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, etc.

2. Facts

George Doyle was married and had three children. He purchased three AQHA horses and showed them all over the country in an effort to raise their value and sell them at a profit. He failed and tried 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 the fraud penalty on some other dealings in the same years. The IRS therefore discounted his credibility and refused to allow him to deduct those horse expenses.

The case is an interesting reading because it goes into great detail about the hardships this family incurred in an effort to make this a profitable business but was unsuccessful in doing so.

3. Law

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:

Again, the overriding concern is whether your testimony that you intended 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 as to whether not they truly intended to make a profit. The Court held that, in spite of their long 11 year history of consecutive losses, that they truly intended to make a profit. It allowed them 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 no matter how unreasonable that intention maybe even after 11 years of losses.

Congress subsequently passed laws allowing for longer periods of allowable losses to be incurred.