Sample paper on Thomas Burger and Marian Burger versus Commissioner of Internal Revenue 809 F.2d 355 (7th Cir. 1987)
This is an appeal from a trial court where the court confirmed the deficiencies discovered by the respondents in the petitioners’ returns. The case was premised on the following facts: Somewhere between 1973-74 Thomas Burger, a surgeon by profession was affected by Dupuytrens Contracture that eventually clamped his fingers and could no longer practise. Together with his wife Marian Burger they decided to set up a dog breeding business because it would allow them to change places and it was an activity they liked. The couple had insufficient expertise in the business and therefore contracted an attorney who advised them as to the zoning complications and retained an accountant.
The couple business name was Shantoma and started breeding Afghan hounds after purchasing from Dr Kennedy. Later, the taxpayers added the Kunasata breed. Meantime, Dr. Kennedy had an obligation to source for the stud in the first three breeding. He failed to provide the stud and the taxpayers meted the breed with one of the Afghan hounds. The taxpayers later acquired other breeds; a male Shih Tzu and two female Shih Tzu pups. The females were mated with different male acquired earlier and as a result produced pups with physical deformities, thus incurring huge losses. Additionally, the petitioners incurred costs in setting up a home, office, in oriental drugs, wallpaper, Japanese prints and others. Moreover, the taxpayers attended 400 dog shows and nearly 20 seminars on dog breeding. The petitioners filed joint tax returns in 1978-80 asserting that Shantoma had run into losses. The Commissioner of Internal Revenue later found discrepancies in the returns and issued Notice of Deficiency to the taxpayers in 1983, prompting the filing of the petition.
- Whether the trial court erred in determining that the taxpayers lacked profit motive?
- Whether the trial court erred in determining that the taxpayers failed to keep proper book of accountings
Section 183 (a) (b) (1) (2) (c) of the Internal Revenue Code
The appellate court held that the trial court was not erroneous in deciding that the taxpayers did not undertake the business with sole objective of realising profit. Consequently, the court affirmed the trial court decision.
The appellate court relied on the wording of section 183 of the Internal Revenue Code which prohibits deductions on activities not intended to generate profits subject to exceptions. The court considered that the Taxpayer failed to maintain proper book accounting method. The petitioners did not maintain separate books for each breed and as such it was difficult to point the exact expenses and losses. Shantoma’s book keeping was more of a hobby than a business venture. Secondly, the taxpayers lacked expertise in dog breeding, they only acquainted themselves with the mechanics of the business but did not contract economic experts such as accountant and therefore the court concluded that the business lacked profit motive. Thirdly, the business had accumulated losses over the years to a tune of $239,000 and only made meagre returns. Even with the losses the couple continued investing in the business. Moreover, by not retaining experts the court concluded that the Shantoma was more of a recreation than a profit oriented business.
The case is significant because the court considered the import of Section 183 of the Internal Revenue Code and henceforth should be considered as a precedent in determining whether an activity is for profit or not.