Race Car Winnings

[Snaggletooth]

Early in last November, this discussion went on involving several respected board participants. To abbreviate the situation as much as I can, IRS was attempting to assess my client a tax liability for his race car winnings, all parties admitting it was a hobby.

TTB and Section §183 gives detailed instructions on how to categorize the applicable expenses, and my strategy was to deduct from the top some expenses which would be "Cost of Goods Sold" thus negating the IRS assessment. Some of you may remember the discussion.

Most of the sentiment opposed the strategy because there were no "goods" to be "sold" in the activity. This position was taken by some of the most knowledgeable members of the board. A couple respected comrades even suggested I was intentionally reporting fraudulently, meaning the position was so clearly wrong that ethical standards were being compromised.

My client and I received a letter today, clearing the assessment due to the acceptable explanation. Maybe I got through to a supervisor who agreed, maybe another supervisor would not have been so agreeable. Is there a lesson? In this case, it is to "trust your own instincts", concepts of right/wrong, and persistent work ethic for your client. If we had lost, the lesson would have been to "listen to those around you" who should know.

I guess we have to live a long time before we learn what to do and when. And even then sometimes we don't always know....

[RitaB]

I remember the discussion

Good job, Ron. Thanks for the update. You are a class act.

[JON]

Please tell us how

you decided which expenses could go above the line... Great-I did not think it would work and you made work. What expenses went dollar for dollar against the winnings and what expenses state in Schedule A Misc Itemized Deductions.

Thank you.

Jon

[DaveO]

Thanks for the update. Glad to hear it worked out for your client.

[JohnH]

Ron: Glad to hear you prevailed.
It would be good to know what items you considered COGS and what went on Schedule A.
(Including which category chewing tobacco & dip fit into)

[Snaggletooth]

Cost of Goods Sold

For those of you who have expressed interest, and are familiar with the categories of expenses:

1) Expenses such as taxes, interest, which would be reportable on Sch A. My client had none.
2) Other Operating Expenses (not to exceed income in the aggregate of ALL 3 categories) would be reported as Misc Itemz Deductions subject to the 2% floor. My client had some $3500 in these expenses, but could not report all of them because of the ceiling. One such expense was hauling his racer 80 miles round trip back and forth to his farm.
3) Expenses which decrease basis. Had my client depreciated his race car, his depreciation for the year in question would have been appx $4000.

The other category, mentioned fleetingly, is Cost of Goods Sold, which is not reported anywhere, but does directly reduce the amount of income reportable on Line 21.

Cost of Goods Sold for any business are costs which so inexorably tied to the sale that it would be impossible to sell without incurring these costs. Obviously, this cannot include indirect or administrative costs. The most obvious item for cost of goods sold is the cost of merchandise. You must have the merchandise to sell it, right?

For my client, one of these "inexorably tied" costs was $550 in entry fees. Impossible to collect winnings without entering the race, right? Another such cost was $1100 in racing fuel. Impossible to race without gas, right? Another $1900 in tires, burning through a set of tires every three races. And then $300 in special motor oil, same rationale as gas.

Subtracting "Cost of Goods Sold" gave my client a loss of $880 before considering these other categories of expenses. Hence no entry on line 21, and no reportable income.

[Burke]

So, in this instance, no income was originally reported and the reconciliation to the satisfaction of the IRS was all done after they assessed tax, and you responded in kind? Or did you file something with the return to begin with?