Tuesday, May 11, 2010

Has The Internal Revenue Service Reclassified Pacers as a "Hobby?"

In various news reports, Jim Morris, President of the Pacers Sports & Entertainment Group, i.e. the Pacers have claimed to have lost money on the team 28 of 30 years. In 2009 news reports, the talk was of losing money 9 of the last 10 years, which I assume by now is 10 of the last 11 years. Quite a losing streak.

When a business continues to lose money year after year, it can end up being classified as a "hobby" by the Internal Revenue Service which would limit business deductions. The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years. The IRS explains the rule:

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

In order to make this determination, taxpayers should consider
the following factors:

  • Does the time and effort put into the activity indicate an intention to make a profit?

  • Does the taxpayer depend on income from the activity?

  • If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?

  • Has the taxpayer changed methods of operation to improve profitability?

  • Does the taxpayer or his/her advisers have the knowledge needed to carry on the activity as a successful business?

  • Has the taxpayer made a profit in similar activities in the past?

  • Does the activity make a profit in some years?

  • Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

With the exception of a couple of these questions, the answers seem to be a resounding "No." Given the fact that the Pacers supposedly have lost money 28 of 30 years (and the presumption is that a business makes a profit 3 of 5) is there any doubt that the IRS, if presented with those financial claims, would reclassify the Pacers as a "hobby?"

Since Morris won't be forthcoming about the Pacers' finances, maybe he can tell us whether the IRS has classified the Pacers as a "hobby" which would support his argument that the Pacers are the money pit he claims the team is.


Downtown Indy said...

We made it to the top of the page at FieldOfSchemes.com

Marycatherine Barton said...

All funnies aside, how about it, Jim, what is your answer to Paul's question here?

Gary R. Welsh said...

If the CIB represented the public's interest, it would have long ago required the Pacers to release its audited financial statements for both the Pacers organization and its entertainment arm. I suspect one of those entities shows a profit, Paul, while the other bears the losses. The CIB won't ask for this information because it doesn't want to know the truth. The board members have a financial interest in keeping the Pacers, and none of them bother to disclose that interest, including at least Paul Okeson, Ann Lathrop, John Dora and Doug Brown.

Paul K. Ogden said...


If they're separate taxable entities I would imagine they both are usually showing a profit. I so agree they don't want to know the truth. Even the Indystar editorial board was puzzled because Lathrop and Okeson didn't know basic information about the contract, the penalties, how much the Pacers were losing...and didn't seem to want to know.