Lack of Profit Motive Leads Court to Disallow Business Expenses

Posted on October 10, 2018

Joy Ford, a former recording artist, ran the Bell Cove Club in Hendersonville, Tennessee since the 1980s. Bell Cove featured live country music on Friday and Saturday nights and only charged a $5.00 admission fee and a nominal amount for snacks and beverages. Many well-known artists have performed at Bell Cove and it is known for furthering the careers of emerging songwriters. Bell Cove’s gross receipts for 2012, 2013 and 2014 ranged from a low of $13,500.00 to a high of $17,000.00 per year. However, on Ms. Ford’s tax returns for those years, she claimed losses ranging from a low of $39,000.00 to a high of $96,000.00 per year. The IRS proposed to disallow her expenses because it believed she did not operate Bell Cove with the intention to make profit. After the IRS issued Notices of Deficiency for the years at issue, Ms. Ford filed suit against the IRS in the United States Tax Court. The Tax Court stated that Ms. Ford did not have the requisite intent to make a profit by operating Bell Cove and, as such, she cannot deduct the business losses in issue. She had no expertise in club ownership, maintained inadequate records, disregarded expert business advice, nonchalantly accepted Bell Cove’s perpetual losses and made no attempt to reduce expenses, increase revenue or improve Bell Cove’s overall performance. Although she earnestly devoted time and energy to operating Bell Cove, the Court held that she was primarily motivated by personal pleasure, not profit, and used the club’s losses to offset her other income. Has the IRS proposed to disallow your business expenses? Call us, we can help.