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Washington Tax Alert April 18, 2007 (hobby loss; two activities)

Washington Tax Alert from Don Barnes, dbarnes@washingtontaxlaw.com
April 18, 2007

The Tax Court issued a decision yesterday holding that a taxpayer was not subject to the hobby loss rules of IRC § 183 with regard to her activities competing in horse shows because the horse show activities were related to her interior design business. The taxpayer’s interior design business operated at a profit which exceeded the losses incurred with respect to the equestrian activities. Tracey L. Topping v. Commissioner, T.C. Memo. 2007-92.

The taxpayer’s CPA reported her equestrian and interior design activities on separate Schedules C for the tax years in dispute. In subsequent taxable years, the CPA reported both activities on a single Schedule C. This case illustrates the importance of taking tax return positions consistent with your legal position. As the Tax Court commented in Topping , positions taken by a taxpayer on a tax return are treated as admissions and can be overcome only if the taxpayer can show by “cogent proof” that they are erroneous.