Accounting Today visitors: the due date post is here.
Road Trip! I had a great time on vacation last month, but it would have been sweeter if I could figure out a way to deduct it. Maybe if I mentioned it here at the Tax Update Blog? Alas, a Tax Court case this week thwarts my cunning scheme.
The Tax Court takes up the story:
In June 2008 petitioner’s adventure began. Over the next 5-1/2 months, petitioner made his way across the continents of Europe and Africa and even made a foray into the Middle East.
Throughout his journey petitioner updated his blog with anecdotes and pictures from his travels. While petitioner included details about some of the sites he saw, places he stayed, and food he ate, many of his explanations do not give enough details for a reader to find the specific site, lodgings, or restaurant described. For example in petitioner’s Paris blog entry he states: “[W]e hit up The [sic] BEST ice cream in Europe. * * * there are a couple of places that serve it and pricing is much higher at one (the ‘tourist’ one as Jeff put it) than at the other one. We walked past the tourist one, which had a huge crowd and walked down the street about half a block to the other one.” Petitioner does not give any more details about where in Paris the best ice cream in Europe can be found.
Petitioner did keep copies of all his receipts, flight confirmations, lodging confirmations, tour confirmations, rail passes, shuttle confirmations, bank statements, tour vouchers, credit card statements, and other miscellaneous receipts from the trip.
The problem wasn’t so much the recordkeeping, then, but the business plan:
Petitioner realized as he traveled, and even more so after he returned to the United States, that the market was already saturated with international backpacking blogs and that his plan for generating income through affiliate sales from his blog would not be profitable. Petitioner then shifted his focus to writing books about his travels and the insights he gained while traveling.
One way to ease the pain of a bad business plan is to deduct the losses:
Petitioner timely filed his 2008 Federal income tax return (return). He listed “world travel guide” as his principal business on the Schedule C, Profit or Loss From Business, attached to the return. On the Schedule C, petitioner did not report any business gross receipts or gross income. He claimed total expenses of and reported a net business loss of $39,138. As part of his net business loss, petitioner claimed deductions for travel expenses of $19,347, deductible meals and entertainment expenses of $6,314, and other expenses of $5,431.
The IRS threw a wrench in this part of the business plan by disallowing the loss under the Section 183 “hobby loss rules.” These rules disallow losses on business activities not really entered into for profit. The Tax Court reviewed nine factors that are used to distinguish a real business from a hobby, and found against the taxpayer (my emphasis::
Petitioner did not maintain any books or records for the activity. He had no written business plan and no estimate as to when his Web site would be operational, when his books would be published, or when he would begin to earn income from the activity. Although petitioner documented and retained receipts for his travel-related expenses, merely maintaining receipts is not enough to indicate a profit motive…
Furthermore, petitioner did not investigate the activity before embarking on his trip. Petitioner incurred over $39,000 in expenses before doing any research into the activity’s profitability. This is an indication that the activity was not engaged in for profit.
My favorite part of the opinion is this footnote, where the court tells us what a “blog” is:
“Blog” is a truncation of the expression “Web log”, which is a regularly updated Web site or Web page written in an informal or conversational style and typically run by an individual or small group.
So now we know.
The Moral? Travel may be broadening, and fun, but not necessarily deductible. Before spending $39,000 on it, you might want to figure out how to earn it back first.
Tony Nitti, Teacher Fails To Qualify As Real Estate Professional: Who Can Pass The “More Than Half” Test?. Tony discusses the case we covered here yesterday.
Paul Neiffer, Don’t Use Your Product When Preparing a Tax Return. I think it depends a lot on the product, but Paul gets more specific in the text: “…it is apparent that you should not be using marijuana when preparing your income tax return.”
Russ Fox, There’s Innocent FBAR Violations, and There’s This. But jailing an occasional real tax violator doesn’t justify shooting jaywalkers.
Robert Nadler, Spousal Abuse Continues to Provide a Powerful Basis for Innocent Spouse Relief (Procedurally Taxing).
Robert Wood, Trump, Taxes, Tampons, And Snoop Dogg
David Brunori, Taxing Beer (Tax Analysts Blog):
The lowest excise tax rates are in Wyoming, Wisconsin, Pennsylvania, Missouri, and Oregon. To put it in context, Tennessee taxes beer at $1.29 a gallon. Wyoming’s tax is $0.02 a gallon. Buy your beer in Cheyenne.
I wonder if Jack Daniels has an effective lobby in the Tennessee statehouse.
Joseph Henchman, Ten Years of the North Carolina Lottery (and Why It’s In Part a Tax) (Tax Policy Blog):
The Lottery was set up ten years ago as a state enterprise to generate revenue for education programs. 50 percent of gross sales are paid out as prizes, 7 percent paid to retailers as a commission, 8 percent to pay for operations (including advertising, which cannot exceed 1 percent of total revenues), and 35 percent to the state for education funding. Additionally, winners pay income tax on their prizes. The odds are not great – table games in casinos have much better odds – but the Lottery has no real competition as it is state-sanctioned.
Think of it as a tax on people who are bad at math.
Howard Gleckman, Clinton Would Tinker With, Not Rewrite, the Tax Code. (TaxVox). And what the tax law really needs is more tinkering, right?
Kay Bell, Is Obamacare headed back to the Supreme Court yet again? I think Justice Roberts has made it clear that he will find a way to protect the mess from all challenges.
TaxProf, The IRS Scandal, Day 825. Today the Prof links to Peter Reilly’s concession that just maybe Lois Lerner ran a biased shop.
News from the Profession. New Study Validates Old Accountant Joke (Caleb Newquist, Going Concern).