Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
MAKING YOUR BUSINESS FLY ABOVE SECTION 183:
FAIR SKIES FOLLOWING RABINOWITZ V. COMMISSIONER INTRODUCTION
So-called “hobby-loss” cases have long created confusion for taxpayers and tax-planners alike. Though taxpayers attempt to carefully structure certain activities to avoid the hobby-loss restrictions of section 183, the Service frequently and often unpredictably disallows losses attributable to such activities.1 In Rabinowitz v. Commissioner, taxpayers recently challenged the Service in the U.S. Tax Court for disallowance of loss deductions connected to the taxpayers’ jet charter company as a not-for-profit activity.2 The court held in favor of the taxpayers, finding that the loss deductions were attributable to a for-profit activity within the meaning of section 183 and related regulations. In reaching the decision, the court mechanically applied the nine nonexclusive factors prescribed by section 1.183-2(b).3 The court found the taxpayers’ general business acumen and “reliable and credible” testimony, among other considerations, to be outcome determinative.4 As a successful challenge to the Service’s disallowance, Rabinowitz serves as a model for satisfying the factors under section 183 and adds to the existing case law and commentary on section 183 hobby-loss determinations. This Note analyzes the facts and circumstances that led to the court’s favorable (and relatively rare) finding of for-profit activity based on the nonexclusive factors enumerated in Regulation section 1.183-2(b). Part I briefly summarizes the facts of Rabinowitz and lays out the statutory framework of section 183. Part II examines the regulations and their application to the Rabinowitz facts and extracts the teachings of the case to provide a useful framework for future taxpayers seeking to avoid the effects of section 183.