Attorney-at-Law

A HAIRY LEASE

In Uncategorized on 04/20/2016 at 15:41

Amy Ndiaye Delia had a tough renewal clause in the lease for the shopping mall booth where she ran her hair-braiding operation. Amy wasn’t licensed cosmetologist, so all she could do was braid; her licensed competitors ran full-service operations. So when the 2008 crash brought major economic hurt to her clientele, and a fashion trend turned away from hair-braiding, Amy was hurting.

The landlord insisted on the five-year automatic reboot in the lease, but backed off to three when Amy pleaded poverty. Amy says she kept the shop going to try to offset the rent, and didn’t walk on the lease lest the walk hurt her credit score.

But Amy was a trifle lackadaisical about recordkeeping, so IRS kicked her deductions, and so does Judge Lauber. The IRS also claimed Amy wasn’t in business.

Judge Lauber is more generous. “We regard several of the regulatory factors as neutral in this case.  The only factor that weighs heavily against petitioner is the salon’s persistent history of losses.  Despite that fact, we are convinced that she conducted her hair-braiding business with an actual and honest (if unduly optimistic) objective of making a profit.” 2016 T. C. Memo. 71, at p. 9.

“She credibly testified that this business failed for reasons beyond her control, including the 2008-2010 financial crisis, an over-concentration of similar businesses in her community, and a marked change in taste among her prospective customers.  It might have been prudent for her to have exited this business before she did, but the long-term rental contract posed a serious obstacle. She concluded, not unreasonably, that trying to salvage as much profit as she could was preferable to risking damage to her credit rating by defaulting on her lease commitment.  She closed the business promptly after extricating herself from the lease.” 2016 T. C. Memo. 71, at p. 9.

“She kept business records and undertook marketing efforts that seem reasonable relative to the scale of her activity.  Operating the salon during [the year at issue] was not a source of great personal pleasure or recreation, and it was surely not a ‘sport’ or a ‘hobby.’  Sec. 1.183-2(a), Income Tax Regs.  Although petitioner had a nostalgic fondness for hair braiding, sitting in an empty booth in a shopping mall is not as much fun as (say) riding horses.” 2016 T. C. Memo. 71, at pp. 9-10.

I’ve blogged enough horsey cases to prove that, Judge. Likewise, Amy wasn’t rolling in wealth, so she didn’t need to generate an offsetting loss while having fun.

But her recordkeeping was poor, she tried to write off meals as a business expense with zero backup, so she gets the 20% negligence chop for those expenses.

Takeaway—If your client has a plausible reason for continuing to operate in the face of losses, and isn’t trying to shelter a lot of other income by having fun, go for it.

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