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Investigation of Father's Mysterious Death Was a Hobby, Not a Business

(Parker Tax Publishing November 2016)

The Tax Court determined that a taxpayer's investigation of his father's alleged suicide, later discovered to be a murder, was not engaged in for profit. Although the taxpayer believed he might be able to eventually adapt his investigation into a book or movie, the court found his efforts were the product of a personal desire to uncover the cause of his father's death, not an attempt to develop a business. Vest v. Comm'r, T.C. Memo. 2016-187.


In 1946, when Herb Vest was two years old, his father was found hanging by the neck in the bathroom of his shop in Gainesville, Texas. The death was originally ruled a suicide, but in 2003 Vest received an anonymous letter asserting that unidentified residents of Gainesville had murdered his father and staged it to look like a suicide. Having realized a large gain on the sale of his financial services business in 2001, Vest had the means to devote significant time and resources to investigating the circumstances of his father's death.

Beginning in 2003, Vest caused partnerships he controlled to pay at least $6.4 million to private investigators, forensic experts, morticians, and writers to assist him in solving the mystery of his father's death and reporting the results. In January 2006, one of his investigators wrote a report concluding that his father's death had in fact been a homicide. The report found, however, that no plausible suspects among Gainesville residents could be identified, that no further leads existed, and that additional time spent investigating the homicide would not prove fruitful. Undeterred, Vest continued his investigation, shifting his focus to the possibility that his father had been killed by government agents in the wake of World War II. He spent considerable effort gathering information, and believed that the story of his father's death could be successfully adapted into a book or a movie.

In November 2007, Vest hired a writer to draft a manuscript, and nine months later received a 96-page partial draft describing the known circumstances of his father's death. This draft was never completed. During this period, Vest also worked with a public relations firm to publicize his story and look for a buyer interested in commercializing it. There was apparently some interest; his father's death was the subject of one episode of a television show. Although this episode generated some publicity, it produced no revenue.

Vest conducted his investigative activities through various partnerships that he controlled. Between 2008 and 2010, the Harold E. Vest, H.W. Powers & Son LLC (HVPS), which Vest owned 100 percent directly or via passthrough partners, was principally engaged in investigating the circumstances of Vest's father's death. HVPS reported aggregate losses of approximately $3.8 million from these activities. By the end of 2010, Vest had been investigating his father's death for eight years. As of that time, his activities had not generated a single dollar of revenue and he had no reasonable prospect of generating future income.

The IRS examined HVPS' returns for 2008 to 2010 and disallowed the deductions relating to Vest's homicide-related investigative activity on the ground that the activity was "not engaged in for profit."


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.

The Tax Court determined that none of the regulatory factors weighed meaningfully in Vest's favor.

The court observed that Vest had no professional training or experience in writing, publishing, or media and had no budget or business plan for his activity, which indicated that he did not conduct his activity in a businesslike manner (factor 1). Although he hired multiple investigators (factor 2) and devoted many hours to the project (factor 3), the court said, he showed little interest in actually making it profitable. The court stated that while Vest had earlier been successful in his financial planning business, those accomplishments were not a good predictor of success as an author, book publisher, or producer (factor 5).

The court noted that Vest did not generate a single dollar of revenue from this activity in any year from 2003 through 2010 (factor 7). Over that time, the court said, Vest's reported losses were continuous and substantial, strongly suggesting that he did not engage in this activity to make a profit (factor 6). Vest did not adjust the scale or direction of his activities as a profit-maximizing person would do, the court said, noting that after his investigator in 2006 found the anonymous letter to be a dead end, Vest did not curtail his expenditures or abandon the project to cut losses. In addition, the court determined Vest had no expectation that assets used would appreciate in value (factor 4), noting the investigations had no meaningful assets apart from the research he accumulated and the incomplete 96-page manuscript, which remained an incomplete draft.

The court observed that after the sale of his business in 2003, Vest had significant financial resources and leisure time available (factor 8) and had strong personal motives for conducting his activity (factor 9). The court noted that Vest clearly found the mystery surrounding his father's death to be very engaging, as he expended significant financial resources pursuing multiple theories.

The Tax Court concluded that Vest did not engage in the investigation of his father's death with the primary and genuine purpose of making a profit, and sustained the IRS's disallowance of his deductions.

For a discussion of the determination of whether 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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