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Lawyer's Automobile Restoration Activity Not a Hobby

(Parker Tax Publishing July 2016)

The Tax Court held that an attorney who restored and sold vintage cars carried out his automobile activity with intent to make a profit. The court found that although the activity was a source of personal pleasure it was conducted in a businesslike manner and, given his prior business experience, the court did not believe the taxpayer would have wasted money on an expensive hobby. Main v. Comm'r, T.C. Memo. 2016-127


Richard Main, an attorney who ran a patent business, also engaged in automobile activity related to 1955 and 1956 Plymouth cars. Main successfully bought, restored, and sold the vintage cars. He advertised online, in print publications, and at live events and traveled throughout the western U.S. to acquire bargain-priced Plymouths. His inventory, at its peak, reached 40 cars, which he stored in a large two-story barn on his ranch in Livermore, California.

Because Plymouths were less popular than other 1950s vintage cars, and replacement parts were difficult to find, Main would occasionally sell some of the unrestorable automobiles and their related parts. He also contracted with a retired jewelry maker and a rubber manufacturer to produce and supply unavailable parts. These parts were used to renovate the cars in his inventory or sold to other Plymouth restorers. Main discovered, however, that the cost of producing these parts exceeded the related sales revenue and ceased contracting for their production.

In 2003 Main's ranch was sold in a foreclosure proceeding, and Main leased the barn from the ranch's buyer until 2008, when he realized that he had underestimated the time required to fully restore the cars in his Plymouth inventory. He then sold off some of the Plymouths and transferred the remaining inventory to a storage facility, for which he paid $900 during 2009 (the year at issue). Also in 2009, Main spent $27,900 to build a separate garage at his residence, and moved the Plymouths from storage and conducted his automobile activity from that location.

In, 2012, Main filed his 2009 Form 1040, on which he reported zero taxable income and no income tax liability. After an examination of the return in 2014, the IRS disallowed deductions relating to Main's automobile activity on the grounds that he lacked the requisite profit objective and had failed to substantiate the expenses underlying his deductions.


Code Sec. 183(b) limits the deductions relating to an activity not engaged in for profit. Reg. Sec. 1.183-2(b) provides a nonexclusive list of nine factors relevant in ascertaining whether a taxpayer conducts an activity with the intent to earn a profit. The factors listed are: (1) the way the taxpayer conducts the activity; (2) expertise of the taxpayer or his advisers; (3) time and effort the taxpayer spends in carrying on the activity; (4) expectation that assets used in the activity may appreciate in value; (5) taxpayer's success in carrying on other similar or dissimilar activities; (6) taxpayer's history of income or losses with respect to the activity; (7) amount of occasional profits earned, if any; (8) taxpayer's financial status; and (9) elements of personal pleasure or recreation. No factor or group of factors is controlling, nor is it necessary that a majority of factors point to one outcome.

The Tax Court found that Main established that his primary objective in carrying on the automobile activity was to make a profit, and held that he was entitled to deductions and depreciation expenses in the amounts substantiated.

The court noted that although Main undoubtedly enjoyed working with Plymouths (factor 9) and his manner of carrying on the activity was unsophisticated, it was businesslike (factor 1). The court observed that Main had experience operating a business and expertise relating to Plymouths; advertised online, in print, and at live events; traveled outside California to acquire cars at bargain prices; contracted with third parties to manufacture parts for him to resell and use in restorations; and abandoned unprofitable aspects of his automobile activity (i.e., he downsized his inventory and stopped contracting for manufactured parts) (factors 1, 2, and 5). Furthermore, the court observed, he devoted considerable time to, and handled all material aspects of, his automobile activity (factor 3). Lastly, the court found, Main's patent business was undergoing a downturn during the year at issue, and Main, a prudent businessman, would not have squandered his hard-earned money on an expensive hobby (factor 8). In short, the court concluded, Main's automobile activity was a business, and his primary objective was to make a profit.

Finding the balance of the factors under Reg. Sec. 1.183-2(b) favored Main, the court held that he was entitled to depreciation deductions relating to the garage, gantry crane, and welding equipment and that he was entitled to deduct the storage expenses relating to his Plymouths.

For a discussion of the factors used in determining if an activity is engaged in for profit, see Parker Tax ¶97,505.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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