Attorney-at-Law

THE 2% SOLUTION – PART DEUX

In Uncategorized on 09/29/2021 at 16:26

I want to begin with a Taishoff “Good Try,” to Vivian Hoard, Esq., even though Judge Courtney D (“CD”) Jones doesn’t buy her arguments about the Section 183 hobby deductions. Ms. Hoard, like The Great Chieftain of The Jersey Boys, transitioned to tax litigation from criminal litigation. The case for today is Carl L. Gregory and Leila Gregory, 2021 T. C. Memo. 115, filed 9/29/21.

We all know that Section 183 allows two (count ’em, two) types of deductions from fun money, that is, income derived from activities engaged in otherwise than for profit, in the case of Carl his boat chartering. The first class of deduction is where the service provides for a specific deduction; in Carl’s case, he gets his couple hundred dollars’ (hi, Judge Holmes) worth of taxes and licenses.

That only leaves north of $300K of expenses in each of the two years at issue. Vivian and Carl claim the 2% AGI floor in Section 67(a) doesn’t apply.

Judge CD says it does. “Section 63(d) defines itemized deductions as deductions other than (i) those allowable in computing AGI and (ii) the deduction for personal exemptions allowed under section 151. Section 183(b)(2) is not identified as a deduction allowable in computing AGI. See sec. 62(a). Consequently, section 183(b)(2) is properly viewed as an itemized deduction. The broader statutory scheme confirms as much; section 183(b)(2) is enumerated under Part VI, Itemized Deductions for Individuals and Corporations, of Subchapter B, Computation of Taxable Income. As the title of Part VI suggests, section 183(b)(2) is by default an itemized deduction, and nothing in the text of section 183 or another provision of the Code suggests otherwise.” 2021 T. C. Memo. 115, at pp. 8-9.

“Miscellaneous itemized deductions are defined as itemized deductions other than those described in section 67(b). See sec. 67(b). Thus, if an itemized deduction, such as section 183(b)(2), is not identified on the list provided under section 67(b), it is a miscellaneous itemized deduction and therefore subject to the restriction provided under section 67(a).” 2021 T. C. Memo. 115, at p. 9.

Judge CD says “The Gregorys misleadingly claim that the plain language of section 183(b)(2) supports their view that it is an above-the-line deduction, placing particular emphasis on the language in section 183(b)(2) capping the amount of the deduction to gross income derived from the underlying activity (less the deduction(s) allowable by reason of section 183(b)(1)). We find this line of argument unpersuasive.

“The language they point to in support of their argument concerns only the maximum permissible amount of the deduction. It does not instruct taxpayers to apply the deduction itself against gross income for purposes of calculating AGI.” 2021 T. C. Memo. 115, at p. 11.

IRS Pub 529 says the same.

Now there is Tax Court learning that says Section 183(b)(2)s are miscellaneous itemized deductions, and one CFC case, but no appellate learning. See 2021 T. C. Memo.115, at p. 9-10.

There’s enough on the table to make a trip to 11 Cir (Carl is in FL) worth considering.

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