That’s Entertainment: The Section 274(n) Disallowance for Entertainment Expenses is Held to Apply to Those in the Entertainment Business in Churchill Downs, Inc. v. Commissioner
Kimberly A. Riker
In Churchill Downs, Inc. v. Commissioner, the Tax Court held that, although Churchill Downs, Inc. (the “taxpayer”) was in the entertainment business, the costs incurred in hosting non-public events leading up to the Kentucky Derby and Breeder’s Cup races, as well as other miscellaneous expenses, constituted entertainment expenses because they could not be categorized as part of the entertainment product. These expenses were ordinary and necessary business expenses under section 162, but their deduction was limited by the disallowance provision in section 274(n)(1). The expenses did not fall within any of the exceptions provided in section 274(n)(2) because they were not incurred in providing goods or services to the general public or in providing goods or services for sale.Part I of this Note discusses the statutory framework of section 274(n) and the application of the “objective test” announced in the regulations under that section. Part II sets forth the facts of Churchill Downs. Part III explains each of the taxpayer’s alternative arguments. Part IV discusses the opinion of the Tax Court. Finally, Part V analyzes the court’s opinion and discusses the implications of the decision for taxpayers in the entertainment industry.