With the Corporate Transparency Act hopefully in our rearview mirrors, I decided to take a brief break from my ongoing series on Subchapter S and report on a different topic. In the last few weeks, the Magistrate Division of the Oregon Tax Court issued two important decisions,[i] both of which center on a singular issue – whether the taxpayer had engaged in an activity for profit and was thus able to deduct its losses under IRC Section 162. These battles, commonly referred to as “hobby-loss” cases, have existed among the Internal Revenue Service and/or the state departments of revenue, and taxpayers for decades. I suspect, with the anticipated significant reduction in staffing at the Internal Revenue Service, we will see more audit activity at the state level throughout the United States. Among the audit activity may be hobby-loss cases.
In Oregon, the department of revenue (the “ODOR”) has recently made the hobby-loss issue a mainstay in its audits of activities where losses result. I suspect it is not earth shattering that activities such as horse breeding, racing and training; wineries and vineyards; automobile racing; airplane rentals; and llama breeding and sales have been under fire by the ODOR as hobbies rather than activities engaged in for profit. Interestingly, the ODOR appears to have added other activities to the list, expanding its hobby-loss exams to include traditional farming and other related activities.