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Saturday, March 29, 2003


Robert Schwartz and Diane Schwarz owned a racing yacht that lost money for much of the 1990s and which they described as investment. IRS disallowed the losses, but in a fact-based analysis, Tax Court believed they entered the activity with a significant profit motive. Elements that worked in their favor included the way they kept their books, the fact that they had other sailboats primarily for recreation, the changes they made in the boat to accommodate changes in racing rules, and their documented pursuit of multiple streams of possible income. This win for the taxpayers was a departure from a case earlier this year involving a taxpayer who lost money pursuing open-road auto racing, where Tax Court made a snide comment about how anyone who enters racing should expect to lose money. I think the Schwartz did a number of things better than the open-road guy, but I suspect a major difference was that the Schwartz were (originally) part of and influenced by a larger yacht racing association, other of whose members were presumably making money, whereas the open-road guy had gone off and created his own association to pursue his hobby (as Tax Court ruled it). Or maybe the Schwartz just had a better lawyer.

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