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Above Or Below The Line? Eleventh Circuit Drops Anchor On Taxpayer’s Hobby Loss Argument

Posted on June 8, 2023

When wealthy taxpayers pursue activities that may throw off some revenue, there is a temptation to treat those activities as a trade or business that may generate valuable above the line tax deductions. Section 183 and boatloads of case law amplify how one must prove the profit intent necessary to treat those activities as a trade or business.

What happens though if the activity is not a trade or business but there are still expenses? Section 183 is technically an allowance provision: it generally provides that a taxpayer can deduct the expenses up until the activity’s income. But those expenses are no longer above the line, and are taken after establishing a taxpayer’s AGI.

That takes us to Gregory v Commissioner, which I discussed earlier this year in A Quick Hobby Loss Refresher: Why These Losses Are Useless (At Least Until 2026). As I discussed, Gregory involved taxpayers who had a Caribbean-based boat chartering business, and the Tax Court treated the activity as one not engaged for profit. The taxpayers had a few hundred thousand dollars in revenue from the yachting activity. As the expenses from the activity were less than 2% of their AGI they were unable to benefit from Section 183. In effect, those expenses were treated like any other expense not connected to a trade or business, that is, they were not deductible.

In Gregory, the taxpayer argued that Section 183, as a more specific statutory provision, should in effect preempt Section 67, with the result that the allowance of expenses under 183 means that those expenses could be deducted above the line to establish AGI.

The Tax Court disagreed, finding that the statutes were not in conflict; rather it just “assumes there is conflict between these two provisions of the Code when in fact each provision may be given effect without precluding or otherwise undermining application of the other.”

On appeal, in a published opinion, the Eleventh Circuit affirmed the Tax Court. There is a majority and a concurring opinion, and for readers interested in understanding the structure of individual taxation, I recommend a read.

The majority opinion mostly follows the reasoning of the Tax Court opinion, finding that the plain language of Section 183 and Sections 62, 63 and 67 mandates treating expenses from non for profit activities as itemized deductions.

The concurring opinion takes a somewhat different tack. It looks to plain language, but only focuses on Section 183 and not Sections 62, 63 and 67. In looking at Section 183 alone, the opinion notes (as does the majority opinion) that the language of that section does not unambiguously classify the expenses as above the line or below the line.

Rather than look to those other sections, the concurring opinion looks to later legislative history. In the legislation known as the TCJA, the conference report specifically mentions 183 deductions as the type of miscellaneous itemized deduction that is no longer allowed, even if they exceeded 2 % of the taxpayer’s AGI.


The taxpayers argued in the alternative that the result was absurd and would justify treating the expenses as deductible. The opinion notes that the absurdity doctrine applies only when “the absurdity is ‘so gross as to shock the general moral or common sense.’” Quoting Packard v. Comm’r, 746 F.3d 1219, 1222 [113 AFTR 2d 2014-1532] (11th Cir. 2014). Here, as the opinion notes, Congress seems to have purposively and “Congress can cap or reduce taxpayer eligibility for a tax deduction if it wants, and, here, it elected to do so.”

The combination of the TCJA and Gregory effectively takes the wind out of the sails of the allowance aspect of Section 183.

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