This tax case resonated in my soul….

Long ago, one of my best buds and I decided to invest in a racing car.  After all, I had survived a rash of wrecks, was given a transfusion laden with HIV, among other assaults.  It was clear that the Supreme Being was giving me a pass.  Why shouldn’t I race cars?

I got certified and practiced in a few tracks around home (home back that was South-Central Virginia, where the good-old-boys reigned supreme).   My buddy still used his custom Honda to race, but we were all set to go whole hog racing our 4^th generation Howe.  (This ‘vehicle’ looked like a Camaro- but that was just the veneer.  Underneath the 22 pounds of aluminum was a 700 HP finely tuned engine, ready to rumble.)

And, then, we were off.  Our first races were a bit “loosey-goosey”.  It didn’t take me long to recognize that trying to win the race made us a target.  And, we didn’t have a lot of extra money to keep repairing our vehicle when we’d get attacked.

We soon settled into a routine.  Aiming to come in somewhere between 3^rd and 6^th on each race.  The money we won was more that it cost us to compete, so we could pay our crew and keep on racing.

Of course, the question came up- is this a business or a hobby?   Me, being (as my fellow good-old-boys called me) the Jew Accountant from New York (you must say that with sufficient derision, by the way) found a way to not make this a hobby.

I knew my business- high tech medical and pharmaceutical product design was not going to profit  or garner new clients from a racing venture.  But, Gary’s business? Oh, yeah.  Building apple and pear storage facilities, with carbon dioxide and nitrogen atmospheric conditions, would keep the good old boys dying to hear stories and to keep using our talents.  (Gary’s main business was insulating homes and buildings with polyurethane foam, with a protective coatings.)

So, there it was.  A business, not a hobby, to support Gary’s main venture.  And, we survived our first two audits, so were really in business.

Which brings up the current tax court case.  How these folks simply blew it.  Or, maybe it was their arrogance that led them down this path.

You see, the IRS rules are simple.  For expenses to be deductible, promotional and advertising costs have to be ordinary and necessary.  Once you invest $ 20,000 to $ 50,000 in a custom race car, the concept of ordinary and necessary begins to get stretched right away.  But, more importantly, these costs must have a defined nexus to the business, to its ability to garner new customers, manage it’s brand, or educate folks about the products and services it offers to the public.

Well, this father and son owned a construction business (Phoenix Construction and Remodeling).  They were race car enthusiasts, but their business was real estate development.   Back in 2013, their firm purchased a race car body and chassis modeled after the 1968 Chevy Camaro.   (Sound an awful lot like our 4^th generation Howe.)  Over the course of the next few years, dad and son elected to deduct some $ 120K (a little bit more) for the costs of the race car.

And, here’s where they went wrong.  Sonny boy raced the car under the moniker “Berry Racing”.  (Yup, you can see that they failed to mention the name of the firm for which they wanted to deduct advertising and promotional expenses!)    Nor did the car manifest a single brand or advertising logo.  (Oh, and in 2013, not a single advertising expense was deducted on their tax return.)

Not surprising, the IRS held that promotional expenses for racing the car were not deductible.  Dad and son were up in arms and took the IRS to Tax Court.  Their allegations were that they met lots of business contacts at the races- but without a company logo on the car or other manifestation of their construction business- the IRS wasn’t buying their story.

The Tax Court ruling  ( Berry v. Commissioner of Internal Revenue. Berry, TC Memo, 2021-42) was that this was clearly not ordinary or necessary for the firm and the expenses were disallowed.  It didn’t help Dad and Sonny’s case that the 2013 expenses for the car were hidden among the construction costs for that year and not detailed as advertising or promotion.

Too bad the Berry’s didn’t bother contacting us to help them.  We might have been able to tilt the tax court decision in their favor.  (OK- except, not quite related to this case, they understated their 2013 revenue by a quarter-million bucks.)