WARNING: WRITING YOUR MOTOCROSS RACE TEAM EXPENSES OFF ON YOUR TAXES COULD GET YOU IN TROUBLE
As an object lesson for other riders, parents, sponsors or potential team owers, MXA presents an abridged legal document from www.leagle.com as warning about how to run a race team and how not to?this is largely a “how not to” example.
The basic rule of writing off an activity from your taxes as a business is the possibility of making a profit?this case shows how serious the IRS is about prosecuting and fining people who don’t fully understand the requirements of writing off a race team. The people involved here tried to write off $57,0000 in motocross costs as business expenses.
CASE: PAQUIN VERSUS THE IRS (INTERNAL REVENUE SERVICE)
CASE NUMBER: No. 25886-08S.
COURT: United States Tax Court.
PETITIONERS: Michael Paquin and Kathy Thomas-Paquin, pro se.
This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code… on issues for decision are: (1) Whether petitioners’ motocross racing activity was an “activity not engaged in for profit” in 2005 and 2006 within the meaning of section 183, and (2) whether petitioners are liable for the section 6662 (a) accuracy-related penalties for 2005 and 2006.
Mr. Paquin is an avid fan of motocross motorcycle racing. In 2004 Mr. Paquin became interested in starting a motocross racing business, and he discussed the idea with Mrs. Thomas-Paquin. Although neither petitioner had any experience in motocross racing or the business of motocross racing, petitioners agreed to give the idea a try. Petitioners did not intend to personally compete in motocross races, but instead planned to sponsor other riders?including Mr. Paquin’s son, MP. Petitioners’ decision to sponsor MP was not based on MP’s skill at motocross racing or even his interest in the sport. Indeed, MP initially was reluctant to compete.
Mr. Paquin also identified more experienced riders, who were unrelated to petitioners, and invited them to join his racing team. Mr. Paquin did not hold formal tryouts or auditions. Instead, he approached riders who performed well at motocross events he attended and who had, in his words, “the right attitude”.
In addition to MP, petitioners sponsored two riders in 2005 and 2006: Tony Merrell and Dee Wade, both of whom were 20 years old in 2005. Petitioners briefly sponsored a third rider, but stopped sponsoring him when they concluded he did not have the skill or dedication to succeed at motocross.
Petitioners made the following oral agreement with each of the unrelated riders they sponsored: Petitioners would pay the riders’ race entry fees, maintain their motorcycles, and transport them to and from motocross events in exchange for 75 percent of the riders’ winnings at the amateur level. Mr. Paquin told the riders that he expected to recover his investment in them if and when the riders became professionals, but petitioners did not reach an agreement with any of the riders concerning petitioners’ share of the riders’ earnings as professionals.
Motocross races are conducted at the amateur and professional levels. All riders must begin as amateurs and may improve their amateur classification by competing and excelling in motocross races. To compete at the professional level, a rider must be at least 16 years old, must have attained the highest amateur class, and must have accumulated a certain number of additional “points” on the basis of the rider’s performance in motocross events.
Amateur riders may earn trophies and gift certificates, some of which are redeemable for cash, but amateur riders are generally ineligible for cash awards. To be eligible for cash prizes a rider generally must compete at the professional level.
It is virtually impossible for an amateur rider to make a profit at motocross?indeed, petitioners admit that even if their riders had won every race they entered in 2005 and 2006, petitioners still would have lost money on the activity. A professional rider, however, can earn a profit through a combination of cash prizes and corporate sponsorships. All of the riders on petitioners’ team were amateurs in 2005 and 2006, and no rider was close to achieving professional status.
Petitioners observed few business formalities in the motocross racing activity. Petitioners did not prepare a written business plan, did not create a separate entity for the activity, did not investigate whether they needed a business license, and did not open a separate checking account (petitioners paid motocross racing expenses from their personal accounts). Petitioners maintained some records of their motocross-related activities and expenses, but the records are incomplete. For example, petitioners deducted $715 for race entry fees in 2006, but Mr. Paquin testified that the actual entry fees were much greater than $715. Petitioners also failed to keep track of how much money they spent on gas to drive to and from motocross races in 2006.
As of the date of trial petitioners continued to sponsor MP’s motocross racing activities but were no longer sponsoring any other riders. Petitioners stopped sponsoring Mr. Merrell and Mr. Wade in 2008 because the riders apparently lost interest in motocross racing. None of petitioners’ riders, including MP, had achieved professional status as of the date of trial.
On July 24, 2008, respondent issued a notice of deficiency that treated petitioners’ income from the motocross racing activity in 2005 and 2006 as other income, disallowed the net operating losses claimed with respect to the motocross racing activity, and imposed an accuracy-related penalty under section 6662(a).
Petitioners reported net losses from the motocross racing activity of $33,052 and $24,934 in 2005 and 2006, respectively, and have never earned a profit from the activity. Petitioners suggest, however, that the activity was still in its startup phase during the years at issue and imply that the limited history of losses should not count against them.
Petitioners presented no evidence regarding the customary startup period in the motocross racing industry. Moreover, petitioners continued to sponsor Mr. Merrell and Mr. Wade until 2008 (when Mr. Merrell and Mr. Wade stopped racing for personal reasons) and continued to sponsor MP as of the trial date. Petitioners’ continued investment in the motocross racing activity despite substantial losses suggests the activity was not carried on for profit.
On the basis of the foregoing, the court concludes that petitioners’ motocross racing activity was an activity not engaged in for profit in 2005 and 2006…and that petitioners were not entitled to deduct expenses associated with the activity. We further conclude that petitioners are liable for…accuracy-related penalties. We have considered the parties’ remaining arguments and, to the extent not discussed above, conclude those arguments are irrelevant, moot, or without merit.