DocketNumber: Docket No. 10030-78.
Filed Date: 5/21/1980
Status: Non-Precedential
Modified Date: 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
TANNENWALD,
FINDINGS OF FACT
Some of the facts were stipulated and are found accordingly. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.
Petitioners are husband and wife, who resided in Frewsburg, New York, at the time the petition herein was filed. They filed a joint Federal income tax return for the year 1975. The term "petitioner" in the singular will be used hereinafter to refer to Roderic G. Barton.
Petitioner became interested in car racing in the early 1950's, when he participated in building stock cars. A stock car is an ordinary automobile altered to increase horsepower, speed, and handling capacity. At that time he did not *403 race the cars himself. Petitioner withdrew from this activity for several years because of business commitments and the economic demands of raising a family.
In 1968, petitioner acquired a modified sportsman and began to drive competitively. Modified sportsman is the name of a class of stock car with a minimum weight of 2,500 pounds. In 1975, in order to compete nationally in the modified sportsman class, a car costing approximately $15,000 would have been needed.
Petitioner raced primarily at two dirt tracks, Stateline in Busti, New York, and Eriez Raceway in Erie, Pennsylvania. The racing season at those tracks ran from the first weekend in May until the first weekend after Labor Day. The races were held on Saturdays and Sundays and approximately 22 races were held at each track. A first-place finish at either track paid $300. Petitioner had never known anyone to win more than half of the races in one season. During the years petitioner drove competitively, he was licensed by the National Association for Stock Car Auto Racing, Inc.
In 1976, petitioner raced for the first time in Daytona, Florida, at Daytona International Speedway. He finished 47th out of 50 cars.
Petitioner *404 lost money in 1968, his first year of racing. Petitioner reported gross receipts, expenses, and net losses from car racing on his Federal income tax returns for the years 1970 through 1976 as follows: Expenses Gross (including "cost Year Receipts of goods sold") Net Loss 1970 $ 880.00 $2,640.00 $ 1,760.00 1971 1,217.50 3,262.50 2,045.00 1972 825.00 1,647.00 822.00 1973 495.00 1974 1,663.00 6,652.00 4,989.00 1975 1,193.00 7,882.00 6,689.00 1976 2,075.00 8,446.00 6,371.00
Petitioner retained only some receipts for racing expenditures. He did not maintain a separate checking account for his racing activities. He kept a notebook for recording information which would aid in properly preparing his automobile for a race.
Petitioner was assisted by two individuals when racing. One worked without pay and the other was given a percentage of any winnings.
Petitioner gets great personal pleasure from automobile racing. He also flies an airplane and water skis.
During 1968 and subsequent years, when petitioner *405 was racing, he spent 50 hours a week working in his electrical contracting business and depended primarily on his earnings from that business to support his family. Petitioner Joan M. Barton also earned income in at least some of those years. Petitioners reported on their income tax returns for the years 1971 through 1976 the following amounts of employee compensation:
1971 | $ 8,047.18 |
1972 | 4,111.00 |
1973 | 2,737.00 |
1974 | 12,330.00 |
1975 | 14,230.00 |
1976 | 14,366.00 |
On their 1974 return, petitioners claimed $3,000 for depreciation on a racer acquired that year at a cost of $3,000. In 1975, petitioner had two race cars: the car acquired in 1974 and another acquired in 1975 at a cost of $4,200.
OPINION
The first issue for decision is whether petitioner's car racing constituted a trade or business, as petitioners contend, or an activity not engaged in for profit, as respondent contends. Section 183(a) *406 in for profit. Section 183(b)(2) provides that deductions which would be allowable only if such activity is engaged in for profit shall be allowed "but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1)." Section 183(c) defines an "activity not engaged in for profit" as "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212."
The test for determining whether an activity is engaged in for profit is whether the individual engaged in the activity with the primary purpose and intention of making a profit; the taxpayer must have a bona fide expectation of realizing a profit, although such expectation need not be reasonable.
Petitioner had a consistent history of losses from his stock car racing activity over a period of years (see p.4,
Granted that losses in the formative years of a business are not necessarily inconsistent with an intention to achieve a later profitable level of operation, there is simply insufficient evidence in the record before us to enable us to conclude that petitioner's activity had the potential for future profitability to support a finding that he had a bona fide intention to make a profit.
We *410 note that, although petitioners argue that there were large amounts of prize money to be won in races in Florida and at various other racetracks and in certain special events, there is no evidence in the record to show that in 1975, or any prior year, petitioner participated in such races or events. The only evidence in regard to races other than those which comprised the regular season at the two local racetracks indicates that petitioner first participated in a race in Florida in 1976 and placed 47th out of 50 cars and that in a later year he once more raced in Florida. *411 Similarly, although petitioner testified that drivers were awarded points according to where they placed in races and that such points resulted in the receipt of prize money at the end of a raining season, he presented no evidence to show the correlation between points and prize money or to substantiate his testimony that money was earned through the scoring of points.
On the basis of the entire record and the foregoing *412 analysis, we conclude that petitioner's stock car racing was an activity not engaged in for profit and that the deductibility of expenses attributable thereto is limited by section 183.
Because of concessions by the parties,
1. Respondent accepts the figures reported by petitioner as correct for purposes of this case, except for $2,500 claimed as a depreciation expense in 1975, the taxable year in issue.↩
*. Not reported; see p. 8,
2. All section references are to the Internal Revenue Code of 1954, as amended and in effect in the taxable year at issue.↩
3. Compare
4. There is a indication that a Dick Barton from Falkoner, New York, won $315 in the 2d Annual Permatex Modified 200 in 1975, but the record does not convince us that the person listed was petitioner. In any event, even if he were, our ultimate conclusion herein would not be affected.
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