October 1, 2022

Tax court rulings

Tax Court Rules That Feng Shui-Inspired Business Plan Made Couple Professional Gamblers

There are plenty of businesses out there that simply don’t have a plan. They may have a sign in the window, products on their shelves and a room full of “keepers” but not much else.

Trieu Le and Baymone Thongtheposmphou, on the other hand, had a plan. When Le’s company moved to Costa Rica in 2005, he opted to turn his focus towards professional gambling.

Sure, there are plenty of people out there that claim to be professional gamblers that would probably be better described as “degenerates” but not Le and Thongtheposmphou. They would use the principles of Feng Shui to focus their wagering efforts on their “lucky days,” increasing their wagering, foregoing sleep and possibly unnecessary food or bathroom breaks in order to maximize their luckiness.


Things were going on swimmingly for the couple until, at some point in 2007, they realized they were 200k in debt, having “withdrawn money from their retirement funds and borrowed against various assets to finance their attempt to make a profit.” These two were obviously committed to their idea and their plan.

TL and BT filed their losses (not to the exceed their winnings, of course) on a Schedule C to be included on the 1040. Unfortch, the IRS wasn’t buying the notion of this “professional gambling” and called bullshit:

Respondent treated petitioner’s winnings as not being from a business (i.e., that petitioner was not in the business of gambling) and accordingly determined that his losses should have been reported on Schedule A, Itemized Deductions, as an itemized deduction rather than a business deduction. The income tax deficiency respondent determined arose from the inclusion of the gambling winnings in income and the resulting increase of the limitations on miscellaneous itemized deductions claimed on Schedule A.

The tax court decided to boil this down to the facts. That being, these two people had a plan – to gamble based on Feng Shui principles. Was this a bad business plan? Certainly not the best but far from the worst. Was it harebrained? Maybe. But was the tax treatment correct? The tax court says yes!

We find that petitioner’s gambling activity was a trade or business that was pursued in good faith, with regularity, and for the production of income, and that it was not merely recreation or a hobby.

[…]

Respondent also argues that petitioners’ approach was not businesslike and that it was irrational. The standard, however, requires only that the profit objective be actual and honest. It would be difficult to find on the record before the Court that petitioner’s approach to making a profit was irrational. For example, if someone’s investment in a stock or a business were based on Feng Shui or some other cultural judgment, that would not per se be “irrational”. Petitioners used their best judgment and successfully tested their business approach. Ultimately, the fact that their approach was unsuccessful does not make it irrational.

So take heed degenerate gamblers with crackpot business plans! As long as you’re using your best judgment and have some semblance of an “business approach” you too can take on the IRS (these two were pro sese, no less). Good luck!

[h/t TaxProf]

Tax Court: Don’t Bet Your Bass on Those Hobby Losses

One of the promised benefits of feminism was that both men and women would reap benefits from allowing women to achieve their potential in the workforce. And for Mr. Steve Lowe, it absolutely worked that way.

The Tax Court gives a hint at Mrs. Lowe’s achieved potential:

During the years at issue petitioner wife (Mrs. Lowe) worked full time as a “controller” for Fry Steel Co., where she has worked for over 38 years. She earned $177,219 and $184,181 in 2005 and 2006, respectively, with an additional $12,000 per year for taking notes at the board of directors meetings.

And how did that work out for Mr. Lowe?

In 2005 Mr. Lowe fits run by either American Bass, FLW Strem Series, or Western Outdoor News (WON) and reported gross income on petitioners’ Schedule C of $4,241. In 2006 Mr. Lowe fished in 15 tournaments run by those same organizations and reported $10,932 of gross income. The entry fees ranged from $280 to $825 with an additional $325 for a “coangler” amateur in FLW events.

Yes, Mrs. Lowe’s empowerment enabled her to hold down a fulfilling and well-paid job, freeing her husband to follow his dreams – to go fishing every day.

The only thing that could possibly be better than fishing every day while your wife brings home a nice paycheck is to get a tax deduction for fishing every day while your wife brings home a nice paycheck. And Mr. Lowe gave it a try, deducting $49,067 of fishing expenses in 2005. Unfortunately, he hooked a snag.

The tax law disallows losses from activities “not engaged in for profit” – the so-called “hobby loss” rules. The Tax Court summed it up (my emphasis):

Mrs. Lowe earned substantial income from her job at Fry Steel Co., and the losses from Mr. Lowe’s fishing activity resulted in substantial tax benefits. During the years at issue Mrs. Lowe earned an average of about $180,000 a year from her job, and petitioners were able to deduct an average of about $41,000 per year on their joint Federal income tax returns due to Mr. Lowe’s fishing activity losses. Mr. Lowe was not employed before the fishing activity and was able to pursue this activity because of Mrs. Lowe’s substantial income. We also note that Mr. Lowe fished for recreation and pleasure long before commencing his competitive bass fishing activity. He clearly enjoyed that activity and likely would have incurred significant fishing costs yearly for personal pleasure had he not conducted his claimed business activity.

The case illustrates some hobby loss red flags:

The activity loses money and shows no sign of doing otherwise – It’s fishing, for heavens’s sake.

The losses offset significant other income – If you would be getting the earned income credit otherwise, the IRS doesn’t invoke the hobby loss rules.

The activity is fun – If your money-losing business can be perceived as fun – like fishing, say, or playing slots – it’s that much harder to convince the IRS that you’re really in it for profit. Remember, though, that even miserable activities (like selling Amway or writing blog posts) can run afoul of the hobby loss rules.

So Mr. Lowe lost his deductions. The Tax Court waived penalties, though, and Mr. Lowe, as far as we know, still can fish every day while his wife works. Millions of red-blooded men would take that deal, even without tax deductions.

Joe Kristan is a shareholder of Roth & Company, P.C. in Des Moines, Iowa, author of the Tax Update Blog and Going Concern contributor. You can see all of his posts for GC here.