Is it a “Hobby” or “Business”?
Part 6
July 31, 2004
By Jim Harnsberger, Sr. Tax Analyst

SAN DIEGO – The eighth and ninth test criteria of the Nine-Point test are important for consideration in terms of how the business owners personal status are viewed in relation to the business activity and if profits are realized in the business activity. A clear definition with objective standards should be made in answering these two important questions.

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 v. Commissioner, supra at 645; Golanty v. Commissioner [Dec. 36,111], 72 T.C. 411, 426 (1979), affd. without published opinion 647 F.2d 170 (9th Cir. 1981); Bessenyey v. Commissioner [Dec. 27,660], 45 T.C. 261, 274 (1965), affd. [67-2 USTC 9488] 379 F.2d 252 (2d Cir. 1967). Whether a taxpayer engaged in an activity with an actual and honest objective of realizing a profit must be determined year to year. See Golanty v. Commissioner, supra at 426; sec. 1.183-2(a) and (ii), Income Tax Regs. More weight is given to objective facts than to the taxpayer's statement of intent. See Engdahl v. Commissioner [Dec. 36,167], 72 T.C. 659, 666 (1979); sec. 1.183-2(a), Income Tax Regs.

8. Taxpayer’s Financial Status
Substantial income from sources other than the activity (particularly if the losses from the activity generate substantial tax benefits) may indicate that the activity is not engaged in for profit, especially if there are personal or recreational elements involved. Sec. 1.183-2(b)(8), Income Tax Regs.
This test is very subjective and must take into account a variety of factors in making any determination or analysis of this objective. If the business activity is the major source of income or the only source of income the argument is swayed more in favor of a profit motive than if the activity represents less than a fifty-percent contribution to all income.

9. Personal Pleasure or Recreation
The existence of recreational or personal elements in an activity may indicate that the activity is not engaged in for profit. Sec. 1.183-2(b)(9), Income Tax Regs. On the other hand, where an activity lacks any appeal other than profit, a profit objective may be indicated. Id . The presence of recreational or personal motives in conducting an activity may indicate that the taxpayer is not conducting the activity for profit. Sec. 1.183-2(b)(9), Income Tax Regs. A taxpayer's enjoyment of an activity does not show that the taxpayer lacks a profit objective if the activity is, in fact, conducted for profit as shown by other factors. Jackson v. Commissioner , 59 T.C. 312, 317 (1972); sec. 1.183-2(b)(9), Income Tax Regs. However, if the possibility for profit is small compared to the possibility for gratification, the latter possibility may be the primary motivation for the activity. White v. Commissioner , 23 T.C. 90, 94 (1954), affd. per curiam 227 F.2d 779 (6th Cir. 1955).

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