First determine the tax issue. Then research the issue and determine your conclu

Question

First determine the tax issue. Then research the issue and determine your conclusion. Finally, write up your results using the following format:

-Issue (Describe the tax issue, i.e., the question that you are researching

-Conclusion (The answer to the tax question)

-Discussion of Reasoning and Authorities

Trade or Business versus Hobby.....

Fred Fisher is a licensed scuba diver who lives in Key Largo. He is employed full-time as an engineer. Five years ago he had been employed as a professional diver for a salvage company. While working for the salvage company he became interested in marine archaeology and treasure hunting. Until last year he gave diving lessons on weekends and trained individuals in the sport of treasure hunting under the name of “Fred’s Diving School.” Three of the diving students he taught subsequently found shipwrecks. Fred generally did not engage in recreational diving.

Last year, Fred began a treasure hunting business named “Treasure Seekers Company.” Hebought a boat specifically designed for treasure hunting and did extensive research on potential locations of shipwrecks. Fred located several shipwrecks, but none were of substantial value. He did retrieve several artifacts but has not sold any yet. Although these artifacts may have some historical significance, they have a limited marketability. Thus, Fred has not yet had any gross income from his treasure hunting activities.

Other than retaining check stubs and receipts for his expenses and an encoded log, Fred did not maintain formal records for Treasure Seekers Company. Fred maintains as few written records as possible because he fears for his safety. He took steps to keep his boat and equipment from public view and took precautionary measures to maintain the secrecy of his search areas. Fred incurred $5,000 of expenses relating to his treasure-hunting activities last year.

Can Fred deduct the expenses of his treasure hunting business or will the IRS claim it is a hobby and disallow the expenses?

Research Aids: Randy R. Reed, III, T.C. Memo 1988-470, 56 TCM. 363, PH T.C. Memo ¶88470

Explanation / Answer

Issue:Can Fred deduct the expenses of his treasure hunting as business expenses?Conclusion:Yes, Fred should be able to deduct his expenses as trade or business expenses.Discussion of Reasoning and Authorities:Section 162 allows a deduction for business expensesthat are ordinary, necessary, and reasonable in amount. Reg. §1.183-2(b)(1)-(9) lists a number offactors that should be considered in determining whether an activity is a trade or business, orshould be classified as a hobby. These include:(1)Manner in which the taxpayer carries on the activity.(2)The expertise of the taxpayer or his advisors.(3)The time and effort expended by the taxpayer in carrying on the activity.(4)Expectation that assets used in the activity may appreciate in value.(5)The success of the taxpayer in carrying on other similar or dissimilar activities.(6)The taxpayer’s history of income or losses with respect to the activity.(7)The amount of occasional profits, if any, which are earned.(8)The financial status of the taxpayer.(9)Elements of personal pleasure or recreation.

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