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Carnival Business Steps Right Up to Take on IRS Audit

Posted on Jan. 31, 2023

An IRS audit of a carnival ride operator’s 2018 tax year came to a queasy end with a $190,629 deficiency and a $38,126 penalty for unsubstantiated contract labor expenses.

W.G. Wade Shows Inc. is challenging the disallowance of $907,756 in contracted labor service expenses that the company says were ordinary and necessary to its business in a Tax Court petition filed November 17, 2022, in W.G. Wade Shows Inc. v. Commissioner.

The IRS says in the explanation attached to the deficiency notice that the company didn’t establish that the contracted service expenses were ordinary and necessary to its business.

The carnival operator argues in its petition that it is entitled to the full amount of deductions for contracted services “reported on the return, as those expenses were paid in the tax year [and] can be fully substantiated through journals, receipts, and/or testimony.”

The disallowed expenses amounted to one-sixth of the claimed labor expenses. The company said that “if there was an understatement of tax,” it had reasonable cause, and there was no negligence or disregard of rules or regulations.

In its answer filed December 2, 2022, the IRS disputes for lack of sufficient knowledge whether the company can substantiate its labor expenses and whether they were necessary and ordinary.

A December 2020 Department of Labor seasonal job order for temporary carnival workers listed pay of $9.57 to $13.33 per hour. Neither the petition nor the deficiency notice provides any information regarding the pay rate.

The company reported gross receipts of $38.5 million for the year, which the IRS didn’t dispute.

According to howtostartanllc.com, a “carnival ride business can pull in a lot of profit each season — but there are also a lot of expenses that come with operating this type of business. A moderately successful carnival ride business can expect to make $100,000 a season in profit or more, depending on the circumstances.”

The website also says ongoing expenses “include ride maintenance, employee wages, insurance, fuel, electricity, concessions, and more.” Necessities listed include a large staff.

The petitioner in W.G. Wade Shows Inc. v. Commissioner, No. 24191-22 (T.C. 2022), is represented by Venar R. Ayar and Hayden Leithauser of Ayar Law.

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