Bowling and tax planning don’t have much in common. Bowling is a lot more fun to play, but to me, it’s only a little more fun to watch (sorry, Robert!). But the two are rarely confused. Which makes a Tax Court case from yesterday stand out.
Mr. Phillips, a retired postal worker from Maryland, took up bowling with a vengeance. The Tax Court takes up the story:
Mr. Phillips is a self-taught bowler who began bowling in the early 1990s. His gross winnings over the years were:
Year Gross winnings
2000 $50,000 to $65,000
2002 0 to 3,700
2004 0 to 300
2005 0 to 300
In 2008, a year with no bowling earnings, the IRS looked at his tax return:
On his Form 1040, U.S. Individual Income Tax Return, for the year 2008 Phillips reported that he earned $67,171 in wages from his postal service position. Mr. Phillips attached a Schedule C, for the “business or profession” of “bowling”. He reported that he earned no gross receipts from bowling and that he incurred $28,243 in expenses.
The Tax Court noted one hint of possible trouble for our bowler:
Mr. Phillips’ tax-return preparer refused to sign the 2008 return because he was afraid of an audit.
But Mr. Phillips went for the tax equivalent of a 7-10 split and filed the return, with unfortunate consequences. The IRS came calling and he ended up in Tax Court, where it was nothing but gutterballs:
At trial Mr. Phillips admitted that some of the checked line items on the seven pages of bank statements were not related to bowling. He was unable to point to any line items that were related to bowling. Mr. Phillips admitted that he did not create or keep any records (other than the seven pages of bank statements) related to any of the expenses reported on his Schedule C. He admitted that some of the reported expenses (both in the “other expenses” category and in the category of the remaining expenses) were for “personal business” and for “gambling”
The Tax Court decided that our bowler lost two ways. First, the court ruled that the losses were “hobby losses,” deductible only as miscellaneous deductions and only to the extent of income:
None of the factors weigh towards the existence of a profit motive, and all relevant factors weigh against the existence of a profit motive. Mr. Phillips earned a profit in only one tax year. He did not conduct the activities in a businesslike manner or make an effort to increase the profitability of his bowling activities. He decreased the amount of time and effort he expended in 2004 after changing shifts at his primary place of employment where he earned a substantial income. We therefore conclude that Mr. Phillips did not engage in his bowling activities for profit.
Then, just to rub it in, the court said that even if the losses weren’t hobby losses, they weren’t substantiated well enough to deduct anyway. Decision for IRS, with the 20% “accuracy related penalty” imposed.
Cite: Phillips, T.C. Memo 2013-215.
Tax Policy Blog Monday Map, part 2:
In New York and California, the government might keep more of that next dollar you earn on your Schedule C than you do.
Congratulations to the TaxProf and Going Concern’s Caleb Newquist on being named to Accounting Today’s list of the 100 Most Influential People in Tax and Accounting. Iowans making the list include David Vaudt, in his new role as the head of the Government Accounting Standards Board, and Senator Chuck Grassley, in his old role as a Senate taxwriter.
Janet Novack, 10 Tough Lessons For College And Retirement Savers–And Tax Reform Her number one lesson is important both for legislators and folks whose tax planning gets too elaborate: “Tax complexity creates hidden costs.”
Domicile is “sticky”. To change it, you need to not only uproot, but also to settle down, at least for a while, someplace else. If you are thinking about becoming a wandering star, you should consider carefully where you will push off from. If it is a high tax state, be prepared for them to want to hang on to you.
Tax Justice Blog, It Wasn’t Property Taxes that Cost DC Residents their Homes. It was just not paying them.
Howard Gleckman, The Demise of Estate Tax Planning (TaxVox): “With the estate tax exemption now up to $5.25 million ($10.5 million for couples) estate tax lawyers are running out of work.” Like it was with Mark Twain (at least at first), I think this report is exaggerated.
Robert D. Flach, TAX BLOGOSPHERE BUDDIES – TRACY SHANNON LEVEY
Russ Fox, The Apprentice, IRS Style
Kay Bell, Marijuana tax opponents hand out pot at Denver rally. “Admit it. You wish you had been in Denver yesterday.”