Snaggletooth please help!!!!

[Super Mom]

I was looking at your old posts on race car winnings, and think I will use you explanation for COGS on race car winnings, my concern is, will the IRS send a cp 2000 or something if they can't see the 1099 somewhere, any suggestions?

[Corduroy Frog]

Yes they will

They will be looking for a Sch C showing the 1099 amount as gross income, or, at minimum, the amount shown on Line 21 as other income. I was already fighting a CP2000 when my infamous battle began. My best suggestion to avoid this would be to enter some number on line 21 that I could support and attach a statement with calculations. This number should be ideally LESS than the 1099 but in no case less than zero.

Remember, just any old expense cannot be considered COGS. The only expenses that qualify are those so inexorably tied to the winnings that the winnings could not have occurred without them. One of these that I used was entry fees of $800 with winnings of $3000. The winnings could not have occurred without entry fees. Other indirect costs cannot be used, such as depreciation, or memberships. I didn't take cartage to-and-from the track but that might be argued.

COGS implies that "goods" are being sold. However, IRS and GAAP recognize that other industries (other than merchandising and manufacturing) have a Cost of Sales section of the income statement.

The client and I received a favorable decision on this, even though some of our eminent board members thought my arguments were unfounded and even unethical. Although I was proud to announce the outcome, I will be the first to admit that the favorable decision might have been simply a matter of which IRS agent made the decision. Not sure everyone in the IRS would decide the same way.

Again, by anyone's fair standards, it should suffice to the IRS that the driver is not trying to deduct a loss. The very idea that they are trying to make "hobby income" from horrendous losses is abhorrent.