Finis Cowan, Attorney - Retired CPA

Petitioner’s Brief on “Unified Business Enterprise” Doctrine

To determine whether _______________ Racing LLC is operated for profit, it should be viewed in combination with Petitioner’s other business that _______________ Racing LLC was used to promote, _______________________ (e.g. Transportation / Insurance / Recruiting). Together, these activities generated a combined profit in every year at issue / 3 out of 5.

“A taxpayer's various activities may be viewed as a single activity if they are sufficiently interconnected. See sec. 1.183-1(d)(1), Income Tax Regs. We look to the organizational and economic interrelationship of the activities, their business purpose, and their overall similarity in determining whether they may be viewed collectively. Id. Further, the Commissioner will generally accept a taxpayer's characterization of his or her various undertakings as one activity unless it appears that the characterization is artificial and unsupported by the facts. Id.” Topping v. Comm’r, T.C. Memo., 2007-92, Mitchell v. Comm’r, T.C. Memo. 2006-145 and Misko v. Comm’r , 2005 TC Memo 166 *10 - Tax Court 2005.  

In addition to the factors in the regulation, the courts in these cases also considered: (a) whether the undertakings are conducted at the same place; (b) whether the undertakings were part of the taxpayer’s efforts to find new sources of revenue from existing assets or relationships; (c) whether the undertakings were formed as separate activities; (d) whether one undertaking benefited from the other; (e) whether the taxpayer used one undertaking to advertise the other; (f) the degree to which the undertakings shared management; (g) the degree to which one caretaker oversaw the assets of both undertakings; and (h) whether the taxpayer used the same accountant for the undertakings. All of these issues are affirmatively answered in Petitioner’s case.

Petitioner’s preparation of assets in 2006 for subsequent business use in 2007 and 2008, bore an "economic interrelationship" with the later commercial use so that the two undertakings were a single activity for purposes of section 183. See sec. 1.183-1(d)(1), Income Tax Regs.; Stromatt v. Comm’r,  2011 TC Summary Opinion 42, *7.

“The taxpayer does not necessarily need to be actively engaged in selling goods or services; it is sufficient that the taxpayer is involved in the activity with continuity and regularity and that the taxpayer's primary purpose for engaging in the activity must be for income or profit.” Commissioner v. Groetzinger, 480 U.S. 23, 35, 107 S.Ct. 980, 94 L.Ed.2d 25 (1987).

In Morton v. US, 98 Fed.Cl. 596, 107 A.F.T.R.2d 2011-1963, 2011-1 USTC P 50,346, the taxpayer’s individual business activities and the business activities of his corporate entities were intertwined and formed a “unified business enterprise,” as required for the taxpayer to be entitled to deduct expenses for aircraft use. “Case law supports Plaintiff's ‘unified business enterprise’ theory and would allow him to take deductions for aircraft use that furthers the business purpose of entities other than RWB. This deduction may be allowed despite the fact that the aircraft is titled in RWB's name, and RWB did not use the aircraft to further its particular profit motive. As long as Plaintiff used it to further a profit motive in his overall trade or business, the deduction is allowed.” Id.,  98 Fed.Cl. 596, *600.

Morton quoted Campbell v. Comm’r, 868 F.2d 833 (6th Cir.1989) which found that a profit motive could exist for an activity that derived its income from a related corporation, that  “an individual may arrange his affairs in order to use his assets to make a profit in a corporation and that such economic arrangements do not require an ‘either-one-or-the-other’ profit motive. The profit motive in these cases need not be isolated and attributed to just the individual or to just the corporation. The entire economic relationship and its consequences are what determine profit motive.” (emphasis added). Id. at 836. It further added that “the close relationship between [the corporation] and [the partnership] establishes rather than negates Health Air's profit motive.” Id. at 837.  

The courts in Morton and Campbell found that “the activities of one entity were clearly in furtherance of another entity of similar ownership; the taxpayer purchased the (assets) with the intention of furthering another entity's business purpose . . . such an intention was indicative of a profit motive that would permit a deduction.”

Other cases show the Tax Court's willingness to acknowledge and accept the inter-relatedness of a taxpayer's multiple business endeavors. The Tax Court has noted that “although the section 183 analysis with respect to the activities of a subchapter S corporation is applied at the corporate level, a taxpayer's intent is attributable to his wholly owned corporation.” Abbene v. Comm'r, 76 T.C.M. (CCH) 444, 1998 WL 643647, at *5 (1998) ( citing Ballard v. Comm'r, T.C. Memo.1996–68; Sousa v. Comm'r, T.C. Memo.1989–581). Still other cases have allowed taxpayer deductions for payments to one corporation that make possible the continuing operation of other businesses in which the taxpayer is involved, as long as the expenses further the taxpayer's profit motive. See Gould v. Comm'r, 64 T.C. 132 (1975); Lohrke v. Comm'r, 48 T.C. 679 (1967).

As the court found in Morton, “the fact that both Plaintiff's salary from HRH and the rent collected by RWB from the Las Vegas Café depended on their respective performances shows that these entities were intertwined with each other and with Plaintiff's profit motive . . . Plaintiff's work for HRH and RWB benefited both by promoting the overall brand. Plaintiff's efforts were thus geared towards creating revenue for all the entities and for himself.” Supra, 98 Fed.Cl. 596, *602.

_____________, Racing LLC and _____________ were interconnected by design, purpose, management, expertise, finances, market segment and relationships among the same individuals and companies. Both _____________, Racing LLC and _____________ existed for the common purpose of serving the __________ing industry. All of _____________, Racing LLC’s sponsors came from relationships Petitioner developed through ________________, _____________, Racing LLC’s sponsors formed a significant share of ________’s customer and referral base and _____________ itself was a significant _____________, Racing LLC sponsor. Both _____________, Racing LLC and _____________ funded and promoted _____________’ ________ trade name and logo and the trucking industry in general. Both shared the same address, leadership, staff, CPA, office equipment, marketing plan, revenue sources and purpose of building Petitioner’s brand and goodwill.   

_____________, Racing LLC did represent an “effort to find new sources of revenue from existing assets or relationships.” (See Regs., supra)  It generated racing and promotional sponsorship revenue from __________S’ insurance customers and from a sponsor (______) that Petitioner introduced to his customers through the racing activities. _____________, Racing LLC was used to advertise __ and its ____________ brand.

_____________, Racing LLC benefitted __ by developing and maintaining positive business relationships, loyalty and goodwill between ____’s employees and owner and ______’s  trucking customers and their vendors, customers, owners, managers and employees. _____________, Racing LLC’s promotional events and services were used to foster networking and goodwill among ___’s customers and their customers and vendors. Petitioner used _____________, Racing LLC to assist _________’s customers by advertising and running a recruiting program for truck drivers to work for ____________’ customers. _____________, Racing LLC was used to add value to __________’s and its customers’ promotional expenditures by dramatically increasing race track participation and attendance. _____________, Racing LLC and __________ were used together as a common agent of Petitioner’s will and they should be viewed together as a Unified Business Enterprise.

This is a recent, but not exhaustive, brief used successfully in a 2013 IRS Appeal of the IRS' denial of racing promotion expenses. Fortunately, the racing enterprise was actually used to promote the taxpayer's other business and created a spreadsheet showing that, viewed together, they were profitable. We also presented letters and expert reports from grateful sponsors, customers and the race track owners who had materially benefitted from the promotional events and taxpayer's related networking.

The best case on this I've found in he hobby loss conext is the Tracey L. Topping case cited but Ms. Topping had one advantage most 183 litigants don't, poverty.

See the nine IRS Reg 1.183 factors analyzed in Topping.