Tax Court Stalls Promo Deduction for Hobby Expense

A new Tax Court case, Berry, T.C. Memo. 2021-42, 4/7/21, flagged a six-figure deduction claimed by construction business owners for their race car expenses.

In some cases, a business will go outside the scope of usual promotional and advertising expenses—like signage, media or online marketing, printed materials and the like—to engage in activities relating to hobbies. The IRS may say that the activities aren’t related to the active conduct of the business nor are they intended to generate revenue or goodwill. Not surprisingly, these cases often end up in the courts—with mixed results.

Facts of the new case: A father and son, residents of California, own a construction business that builds houses and develops other real estate They are long-time race car enthusiasts. The son restored his first race car with his father and began racing it when he was 16 years old.

In 2013, the firm purchased a race car body and chassis modeled after a 1968 Chevrolet Camaro for the son to restore and race. It also purchased car parts in 2013, including an engine, to use in the 68 Camaro. The firm claimed deductions totaling almost $122,000 for the car racing expenses. The son finished restoring the 68 Camaro and began racing it in 2014.

All of the son’s racing activities were conducted under the name “Berry Racing.” The firm didn’t report the car racing expenses as advertising expenses on its 2013 return. The only photograph of the 68 Camaro in the record doesn’t show any firm branding or advertising on the car.

The IRS disallowed the deduction for the firm’s promotional expenses relating to racing the car. Now the Tax Court has sided with the IRS.

Tax Court’s reasoning: The firm hasn’t met its burden of proving that the expenses were ordinary and necessary promotional expenses. All of son’s racing activities were conducted under the name “Berry Racing”—not the firm’s name.

Although the taxpayers testified that the 68 Camaro featured advertising for the firm and that they met business contacts at the racetracks, no company logo or wordmark is visible in the only photograph of the car they presented to the Tax Court. Furthermore, the record lacks any credible evidence that the contacts led to any construction business for the firm.

In actuality, the Court said that the firm didn’t treat the car racing expenses as advertising expenses on its 2013 return. Instead, it buried the car racing expenses among its many construction expenses.

Finish line: The taxpayers did not demonstrate that the expenses were either ordinary or necessary to the firm.