Dirt Track Racing Expenses Not Ordinary and Necessary Business Expenses

In a recent decision reported by the Administrative Law Judge, (Jackie and Stephanie Sparks v. State of Alabama Department of Revenue, Docket #04-888, 5/19/05) the ALJ found that expenses incurred by Mr. Sparks with respect to his dirt-track racing activity did not qualify as "ordinary and necessary business expenses" under Alabama code 40-18-15(a)(1), nor did they give rise to non-business losses incurred in a transaction entered into for profit as allowed in 40-18-15(a)(5).

Sparks testified that he had been racing cars on dirt tracks for more than ten years. He was introduced to the activity as a child by his father and uncle, and bought his first racing car at the age of 21. He performs most of the maintenance on the cars himself, and enters 35 - 40 races per year. He and his wife both have full-time jobs, and he schedules his racing to avoid any conflicts with his day job. When asked at the hearing why he raced, Mr. Sparks responded

"For the fun of it, you know, playing around (with) it. I'd like to quit my job and go racing for a living. I mean, but I can't just quit (my job) and go do that. I'd - I'd like to."
The Sparks deducted losses from racing of between $12 and $13 thousand dollars on their 2001 and 2002 income tax returns, with gross income from the activity of $1,050 in 2001 and $1,135 in 2002.

According to the ALJ, the taxpayer's primary purpose for engaging in the activity would have to be making a profit in order for the expenses to be deductible. There has to be a "good faith expectation of making a profit." The ALJ went on to distinguish the case in several respects from a similar case, State of Alabama v. Dawson, 85-130 (Admin. Law Division 11/19/85). The taxpayer in Dawson was a drag racer who had deducted losses with respect to his racing operations. Those losses were challenged by the Department of Revenue, but the taxpayer was upheld on appeal by the Circuit Court. In contrast to Sparks, Dawson had no other sources of income other than his drag racing operations. Also, Dawson reported increasing gross income in each year examined by the Department, and actually had a small net profit in the final year.

After considering all the evidence, the ALJ concluded that Sparks "... did not conduct his racing activities with a reasonable expectation of making a profit." His dirt track racing operation was his "... lifelong hobby, not his business." ADOR had acted properly in disallowing the expenses.

This page last updated 8/22/05

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