T.C. Memo. 1997-436
UNITED STATES TAX COURT
ANTHONY J. MCCARTHY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16929-96. Filed September 24, 1997.
Toni Robinson, Raj J. Mahale, Susan L. Moon, Erin M.
O'Hanlon, for petitioner.
Robert E. Marum, for respondent.
MEMORANDUM OPINION
DINAN, Special Trial Judge: This case was heard pursuant
to section 7443A(b)(3) and Rules 180, 181, and 182.1
1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable year in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
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Respondent determined a deficiency in petitioner's Federal
income tax for 1993 in the amount of $3,696.
After a concession by respondent,2 the issue for decision is
whether petitioner is entitled to a business loss deduction for
amounts paid in connection with his son's motocross racing
activity.
Some of the facts have been stipulated and are so found.
The stipulations of fact and attached exhibits are incorporated
herein by this reference. Petitioner resided in New Britain,
Connecticut, on the date the petition was filed in this case.
Petitioner was employed as a construction worker during
1993, specializing in concrete work. He worked approximately 40
hours per week. Petitioner has three children. The activity in
issue is related to his oldest son, Benjamin.
As early as 1989, at the age of 9, Benjamin showed an
interest in riding motorcycles. Petitioner believed Benjamin had
a special talent for racing far greater than other children his
age. At the end of 1992, when Benjamin was 12 years old, father
and son decided that they would devote a substantial amount of
their energies to Benjamin's racing activity.
2
Respondent concedes that petitioner has substantiated
the amounts of his claimed Schedule C expenses. Respondent has
only disallowed the portion of the expenses that produced the
loss in issue. Therefore, our decision is limited to such
portion.
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Petitioner conducted research on sponsorship opportunities
and racing strategies. He decided which races Benjamin would
enter and what size motorcycle Benjamin would ride. He performed
any necessary maintenance or repair work on the motorcycles. In
addition to his involvement in Benjamin's racing, petitioner's
experience with motocross racing includes 2 years of his own
amateur racing in 1976 and 1977.
Petitioner purchased a vehicle that he described as his
"race truck". The vehicle has sleeping quarters for four
individuals and is equipped with a refrigerator, microwave,
toilet, shower with running hot water, and television. The
vehicle also has a rear work area where petitioner prepares
Benjamin's motorcycles for the races.
Benjamin entered numerous races and placed well in most of
them. At the time of trial, Benjamin had not moved from the
amateur to the professional level. As an amateur racer, he is
not eligible to receive cash prizes for racing within the United
States. During 1993, Benjamin won noncash vouchers worth $2,525
that were redeemable for racing merchandise, parts, and
equipment. He turned over $2,250 of the vouchers to petitioner,
who used them to pay for racing expenses.
Benjamin reported gross income in the amount of $2,525 for
the vouchers on his 1993 Federal income tax return. He claimed a
deduction in the amount of $2,250 for management fees. The
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management fees consisted solely of the vouchers that Benjamin
gave to petitioner.
Petitioner reported gross receipts in the amount of $2,250
on his 1993 Schedule C as management fees, representing the
vouchers he received from Benjamin. He claimed Schedule C
expenses related to Benjamin's racing activity in the amount of
$15,467, which produced a loss of $13,217. In the statutory
notice of deficiency, respondent disallowed the claimed loss on
the ground that the expenses paid or incurred in connection with
the racing activity were for an activity not entered into for
profit under section 183.
Respondent's determinations in the statutory notice of
deficiency are presumed to be correct, and petitioner bears the
burden of proving otherwise. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). Moreover, deductions are strictly a
matter of legislative grace, and petitioner bears the burden of
proving his entitlement to any deductions claimed. Rule 142(a);
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Petitioner claims that during 1993 he was engaged in the
business of managing his 13-year-old son's motocross racing
career.3 He and Benjamin each testified that they had an
unwritten understanding that petitioner would take care of the
3
Benjamin turned 13 years old on April 14, 1993.
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business and planning aspects of the racing while Benjamin would
concentrate on training and improving his racing skills.
Section 162(a) provides for the deduction of all ordinary
and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business. Whether an activity
constitutes the taxpayer's trade or business within the meaning
of section 162(a) generally depends upon whether the taxpayer's
primary purpose for engaging in the activity is for income or
profit, and whether the activity is conducted with continuity and
regularity. Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).
Both parties frame the issue in this case as being whether
petitioner's claimed business loss for his management activity is
limited by section 183. Section 183(a) disallows any deductions
attributable to an "activity * * * not engaged in for profit",
except as provided in section 183(b). The parties argue that the
nine factors contained in section 1.183-2(b), Income Tax Regs.,
should guide our decision.
During 1993, petitioner supported Benjamin's participation
in motocross racing. We find that petitioner has extended his
time and effort well beyond the degree that parents ordinarily
devote to their children's "extracurricular" interests. In any
event, simply because he chose to spend an extraordinary amount
of money on behalf of his son and devoted most of his spare time
to Benjamin's motocross racing does not establish that
petitioner's loss was incurred in a profit seeking activity. We
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agree with petitioner's contention that Benjamin's motocross
racing activity is different from his other children's
extracurricular activities. However, we believe the difference
between Benjamin's and his siblings' extracurricular activities
is not in the nature of the activities (i.e., business versus
personal), but in the amount of time and money spent by
petitioner on those activities. We conclude that petitioner had
personal rather than business motives for incurring the loss in
question on behalf of Benjamin.
Furthermore, the record amply demonstrates that Benjamin has
enjoyed a great deal of success at the amateur level of his
motocross competition and may very well compete at the
professional level at some time in the future. However, we find
that petitioner did not engage in his management activity with
the requisite profit objective necessary to support deductions
under section 162(a) for the taxable year in issue. There was no
possibility that petitioner could have realized a profit from his
management activity during 1993 because Benjamin was an amateur
motocross racer during that year and was not eligible to win any
cash prizes. In fact, Benjamin was not eligible to compete as a
professional for cash prizes until he turned 16 years old on
April 14, 1996. At the age of 17, he had still not become a
professional motocross racer.
If and when Benjamin begins to compete professionally for
cash prizes, petitioner's management activity may be considered
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an activity with the opportunity to produce a profit. During the
year in issue, however, petitioner failed to show a profit
objective for conducting the activity in which he incurred the
loss on behalf of his son.
We hold that petitioner is not entitled to the claimed
business loss.
To reflect the foregoing,
Decision will be entered
for respondent.