The Tax Court properly determined that a social club could not offset its income from investments with losses from nonmember activities because they were not held for the primary purpose of making a profit.
Although the Appeals Court found that the Tax Court misread Portland Golf Club,, SCt., as wholly dependent on demonstrating profitability and therefore it had no occasion to evaluate whether evidence other than the club’s chronic unprofitability might demonstrate an intent to profit. However, the club never adduced any evidence that it attempted to stem its flood of losses, or that it expected to eventually profit. Instead, it asked the court to consider just two of the nine Code Sec. 183 factors: the businesslike way the club planned and conducted the nonmember events, and the appreciation of its land. The court found that the club cited no concrete evidence that it adopted any “new techniques” or abandoned “unprofitable methods in a manner consistent with an intent to improve profitability.” In addition, taxpayers cannot “avoid Code Sec. 183 and deduct large losses simply by conducting an unprofitable activity on a piece of land that is appreciating independently of or in spite of the activity.”
In addition, accuracy-related penalty was properly imposed because the club offered no evidence that its reliance was objectively reasonable or in good faith. It submitted no opinion letters, and no correspondence detailing advice or suggestions that its accountants provided. Further, the club marshalled virtually no evidence supporting its arguments for underpayment even under its argument for a novel application of Portland Golf Club.
Affirming the Tax Court, 114 TCM 198, Dec. 60,989(M), TC Memo. 2017-158.
Losantiville Country Club, CA-6
Code Sec. 512
CCH Reference – 2018FED ¶22,837.85
Code Sec. 6662
CCH Reference – 2018FED ¶39,651G.305
Code Sec. 6664
CCH Reference – 2018FED ¶39,661.654
Tax Research Consultant
CCH Reference – TRC EXEMPT: 15,206
CCH Reference – TRC PENALTY: 3,116