Īs highlighted in the opinion, the taxpayer's circumstances are significantly affected by the allocation of this deduction, underscoring the relevance of the relevant law for the tax year currently under review by the Court. Facing deficiencies and penalties, the Gregorys petitioned the Tax Court, which granted summary judgment for the Commissioner. Moreover, because the Gregorys had earned tens of millions of dollars in 20 and, at that time, the Code allowed miscellaneous itemized deductions only to the extent that they exceeded two percent of adjusted gross income, the Commissioner disallowed the Section 183(b)(2) deductions altogether. After an audit, the Commissioner determined that the Section 183(b)(2) deductions were miscellaneous itemized deductions under Section 67, meaning that they belonged “below the line” and reduced adjusted gross income, not gross income. The Gregorys deducted some of those expenses under Section 183(b)(2) and placed them “above the line” to reduce their gross income. Though the hobby generated income, it also incurred sizeable expenses each year. They did not conduct the chartering activity for profit - it was a hobby. Consequently, the facts of the case, as presented in the opinion, are not in dispute.Ĭarl and Leila Gregory chartered their yacht, Lady Leila, in 20. The Facts of the CaseĪt this point in the case, the taxpayer does not dispute that their activity falls under the purview of IRC §183. But we must decide where those deductions belong on a taxpayer's return: above the line (reducing gross income) or below the line as miscellaneous itemized deductions (reducing adjusted gross income). While the provision establishes the limitation on deductions for expenses associated with such an activity, the subsections do not specify whether these deductions should be factored into the computation of adjusted gross income or treated as itemized deductions on an individual tax return.Įveryone agrees that Section 183(b)(2) allows a deduction for a certain amount of hobby losses, which is capped at the hobby's gross income. (2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1). (1) the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed. In the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section. Consequently, these deductions are subject to the limitations imposed on claiming such deductions. 22-10707, held that expenses associated with an activity not pursued with the intent of generating a profit, as defined under IRC §183, fall into the category of miscellaneous itemized deductions under IRC §67. The Eleventh Circuit, in the case of Gregory v.
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