U.S. Seventh Circuit - The FindLaw 7th Circuit Court of Appeals Opinion Summaries Blog

Indianapolis Horse Racing Track Was a Business, 7th Cir. Rules

It turns out that a horse racing track in Indianapolis was a horse racing business and not just a rich man's hobby. But the Seventh Circuit came to this conclusion for reasons altogether different than those used by the lower tax court.

The lower court got the result right, but used erroneous and "goofy" reasoning, according to Judge Posner.

Horse Racing Track as a Hobby

Indiana entrepreneur Merrill Roberts first became interested in horse racing back in 1999 and built a track on land he owned in the state. In 2005, he sought to built a facility on the same land but had to move the operation to another city when Indianapolis set up roadblocks against the facility's construction. The US tax court assessed the nature of what the facility was in 2005 and 2006 and came to the conclusion that it was a business sometime in 2007. In the opinion of the tax court, Roberts had erroneously deducted expenses in '05 and '06 since the track was only a hobby at the time.

Posner's Take: the Wrong Test

Posner's view (and the overall opinion of the circuit) is that the conclusion of the lower tax court is "untenable." It had based its ruling on what Posner called a "goofy" regulation: "26 C.F.R. Section 1.183-2, Treas. Reg Section 1.183-2: Activity Not Engaged in for Profit Defined." It was incorrect, said Posner, for the tax court to focus on a "certain level of profitability" in making its determination of whether or not a certain activity broke the threshold of hobby into business. The decision of the lower court implies that a business's start-up costs are not deductible -- an absurdity.

Neutral Tests

The cited regulation actually allows for the court to use a different balancing test to determine whether or not a hobby-like activity crosses over into business status. The nine-factor test also takes into account profitability findings, but that is only one of nine factors. But even under this, Robert's track and facility still amounted to a business.

Fun Allows You to Escape Taxes?

Also at issue in the case was whether or not Roberts' level of enjoyment should have been taken into consideration in determining business status. But Posner saw past this and wrote that: "It may have been a fun business, but fun doesn't covert a business to a hobby. If it did, Facebook would be a hobby, Microsoft and Apple would be hobbies, Amazon would be a hobby, etc. ad infinitum."

Yeah, reducing taxes does sound like a fun thing to do.

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