Discussion:Taxpayer defends hobby position

Say you want an activity to be considered hobby. You make perhaps $500-$3,000 per year on it at any time. And assume that you make plenty of other money on W-2's, 1099-B's, etc. That way the taxpayer is not dependent on income from the hobby.

Do you think that the IRC 183 rules and regulations issued under its authority (ie the 9 factors) can be used as your defense to claiming its a hobby?

I think the answer is transparently "yes". However, on another board (MSN Money board) they branded me an illegal tax protestor for suggesting that. Even a supposedly Ex-IRS employee felt I was wrong.

The point is to avoid SECA taxes on what is varying income and in a case where there would be few business deductions if it went onto Schedule C, anyway.

I'm wrong...they're correct, then only the government can use all 9 factors to evaluate your activity, but once you make a profit, that one factor is more powerful then all the others.

Somehow that makes no sense to me. But in the midst of tax season I wonder...

Sorry.

I am new here so if it goes against the board's normal flow or conduct: I'm sorry, it's not like I destroyed the earth, is it?

Going under the 9 factors you can reasonably conclude a hobby under the facts given above. The actual profit, even "if varying, but regularly between $500-$3,000" shouldn't override all the other factors.

Sec. 183(d) and regulations issued thereunder Reg. 1.183-1(d)

In a case where the government wants to prove it's a business or hobby (depending on their motive) they use Sec. 183 and the Regs to go through a 9 factor checklist.

Let's say in a case where the taxpayer wants to prove it's a hobby -- can he or she rely on the same checklist?

Yes, usually you don't want it to be a hobby, but at $500-$1,000 with minimal expenses, the savings of escaping SECA coverage outweigh the business designation.

My mind says yes, but tax season is running it over...

Ouch..I was looking for specific advice in terms of how the law applies, as in is the checklist available as a defense to a hobby position claim. AKA The regulatory checklist goes both ways and is not just limited to hoby-loss limitation rulings.

I can make the decision once I know that I can rely on all 9 factors to argue it is a hobby. If I lose those factors, then I know I have nothing to stand on.

Oh, no, as long as the regulatory checklist can be used in the taxpayers defense of a hobby position, then I'm satisfied.

If someone tells me that checklist is something exclusively for the government to use only to invoke the hobby-loss limits and re-class a Schedule C into hobby...and not a valid defense to classing something as hobby, initially, then I would have reconsidered.

The government can use it -or- the taxpayer can use it depending on who's on the defensive. That analysis is what I wanted confirmation of.

Since, IRC 183 places presumption and shifts the burden of proof with that 3 out 5 years of income rule (unless it's a horse hobby, where the years change.) I wanted to be prepared.

Now I just need to harass my old employer to sign off on my CPA license...So I can look forward to all sorts of malpractice lawsuits j/k.