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In general, section 162(a)1 allows a deduction for all ordinary
and necessary expenses paid or incurred during the taxable year
in carrying on a trade or business. In order for an activity to
be considered a taxpayer's trade or business for purposes of
section 162, the activity must be conducted “with continuity and
regularity” and “the taxpayer's primary purpose for engaging in
the activity must be for income or profit”. Commissioner v.
Groetzinger, 480 U.S. 23, 35 (1987).
Respondent argues that the deductions here in dispute are
not allowable under section 162(a). According to respondent,
petitioners’ horse racing activity did not constitute a trade or
business during the year in issue because petitioners did not
engage in that activity for profit.
The test of whether a taxpayer conducted an activity for
profit is whether he or she entered into, or continued, the
activity with the actual or honest objective of making a profit.
See Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Dreicer v.
Commissioner, 78 T.C. 642, 644-645 (1982), affd. without
published opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-
2(a), Income Tax Regs. The taxpayer's profit objective
must be bona fide, taking into account all of the facts and
circumstances. See Keanini v. Commissioner, supra at 46; Dreicer
1Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for 1994. Rule references are to
the Tax Court Rules of Practice and Procedure.
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Last modified: May 25, 2011