Under Code §183(b), a taxpayer’s activity that is not engaged in for profit gives rise to deductions only to the extent of income. No excess deductions arise that can be used to offset other income, and no net operating losses are produced.
Joy Ford, a Country Music recording artist and promoter, owned and operating the Bell Cove Club, a lakeside music venue in Hendersonville, Tennessee. The club featured live country music on Friday and Saturday nights. Joy devoted most of her time to the club and paid all of its expenses. The club charged a $5 admission fee and a nominal amount for snacks and beverages.
The club operated at a loss, reporting losses in 2012-14 of $39,285, $74,120, and $96,893. Joy used the losses to offset other income she had. The club’s recordkeeping was atrocious and didn’t match up to the tax filings. Joy had opportunities to make the club profitable, including a possible television show and converting it into a restaurant. Joy declined these opportunities.
Upon review, the Tax Court concluded that the club was not engaged in for profit, and applied Code §183(b) to eliminate Joy’s use of the losses against other income. Key factors cited by the court were that Joy had no expertise in club ownership, maintained inadequate records, disregarded expert Business advice, nonchalantly accepted Bell Cove's perpetual losses, and made no attempt to reduce expenses, increase revenue, or improve Bell Cove's overall performance.
Why was Joy operating this way? Owning Bell Cove elevated her status in the country music community, allowed her to further the careers of young performers, offered her weekly opportunities to interact with country music fans, and satiated her love for promoting country music. She earnestly devoted time and energy to Bell Cove but was primarily motivated by personal pleasure, not profit.
One would think that a night club would always qualify as a business for these purposes, but there you go. The lesson here is that what looks like a business, smells like a business, and in many ways operates like a business, may not be one for purposes of the Code §183(b) limitations.
Joy Ford, TC Memo 2018-8