Tax Court in Brief | Walters v. Comm’r | Deductibility of “For Profit” Business Expenses

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The Tax Court in Brief – March 7th – March 11th, 2022

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation:  The Week of March 7, 2022, through March 11, 2022

Walters v. Comm’r. | T.C. Memo 2022-17 | March 7, 2022 | J. Wells| Dkt. Nos. 13060-15, 13097-15

Short Summary: This opinion resolves two separate cases involving the same issues and facts. The IRS denied expenses declared by a partnership in connection with an alleged business activity, which involved a residential property. One case pertained to a husband and wife and, another, to their daughter. She held an approximate 5% interest in the partnership. The IRS argued that the taxpayers’ conduct demonstrated personal use of the home—as opposed to a “for-profit” activity. The taxpayers asserted the partnership built and maintained the residence to promote the “green” real estate consulting business the partnership endeavored to develop. The parties’ tasked the court with resolving whether the activity was “for-profit” in terms of IRC § 183 and, secondly, whether the taxpayers were liable for penalties assessed in addition to the deficiencies.

Primary HoldingsThe Court found that, while not perfectly executed, he taxpayers’ activities–when viewed as a whole–in connection with the house were “for-profit” as defined by Code section 183 and related Treasury Regulations. Because the deficiencies were issued in error on the basis that the activity was not “for profit,” the taxpayers were not liable for the penalties.

Key Points of Law:

Insights: This case identifies the factors involved in determining whether an activity is “for profit” under section 183 such that expenses incurred in the “trade or business” of that activity may be deducted pursuant to section 162. Decisions on the subject will be made on a case-by-case basis.  The manner in means in which an activity or supposed “business” operation is executed, as well as how those operations are documented, planned, intended, and–if necessary–presented to the IRS or the Tax Court, are critically important to ensure that the “for profit” factors, when placed on the scales of justice, favor the taxpayer for applicable tax benefits. If a taxpayer suspects that the IRS may challenge a deficiency in a close case, prior to deciding on the more aggressive position, it is worthwhile to consider: (1) whether the deductions are significant enough to merit funding a tax appeal and (2) establishing a reserve to fund any future litigation any pay any assessment.

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