Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 78-22

1978-1 C.B. 72

Sec. 183
Sec. 702

IRS Headnote

Hobby losses; activities of sole proprietorship and partnership. An owner of race horses who had losses from racing activities as a sole proprietor in 1975 and filed the election provided by section 183(e) of the Code, formed a partnership in 1976 engaged in the activity of racing the same horses, and resumed racing horses in 1977 as a sole proprietor while still a partner is considered engaged in two separate activities. The election with respect to the 1975 losses and the presumption period under section 183(d) are not terminated by formation of the partnership.

Full Text

Rev. Rul. 78-22

Advice has been requested whether, under the circumstances described below, a taxpayer was engaged in one or two activities for the purposes of the presumption provided by section 183(d) of the Internal Revenue Code of 1954, and the election provided by section 183(e).

In 1975, the taxpayer owned and raced horses as a sole proprietor. In that year, the expenses incurred by the taxpayer in the racing activity exceeded the income therefrom, and the taxpayer filed an election provided by section 183(e) of the Code for that year.

In 1976, the taxpayer formed a partnership with other individuals. The taxpayer contributed the horses owned by the taxpayer to the partnership, and the other partners contributed cash. The partnership's only activity was the racing of the horses contributed by the taxpayer. In 1976, the partnership's expenses attributable to the racing activity exceeded the income therefrom.

In 1977, the taxpayer acquired other horses and resumed the activity of racing horses as a sole proprietor while still a partner in the partnership.

Section 183 of the Code provides that in the case of an activity engaged in by an individual, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed except as provided in this section.

Section 183(e) of the Code provides that generally a determination whether the presumption provided by section (d) applies with respect to any activity will, if the taxpayer so elects, not be made before the close of the sixth taxable year, in the case of an activity that consists in major part of the racing of horses, following the taxable year in which the taxpayer first engages in the activity.

The presumption under section 183(d) provides that if the gross income derived from an activity for two or more of the taxable years in the period of seven consecutive taxable years that end with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit.

Section 1.183-1(d)(1) of the Income Tax Regulations provides that in order to determine whether, and to what extent, section 183 of the Code and the regulations thereunder apply, the activity or activities of the taxpayer must be ascertained. For instance, when the taxpayer is engaged in several undertakings each of these may be a separate activity or several undertakings may be one activity.

Rev. Rul. 77-320, 1977-2 C.B. 78, holds that section 183 of the Code applies to the activities of a partnership, and the provisions of section 183 are applied at the partnership level and reflected in the partners' distributive shares.

Accordingly, because section 183 of the Code must be applied at the partnership level with respect to activities engaged in by a partnership and at the individual level with respect to activities engaged in by a sole proprietor, the taxpayer's activity of racing horses as a sole proprietor and the activity of the partnership racing horses are two separate activities for purposes of section 183.

Therefore, the taxpayer's election under section 183(e) of the Code and the presumption period under section 183(d) for the activity of racing horses as a sole proprietor are not affected by reason of the taxpayer's becoming a partner in the partnership whose activity is racing horses.

In the instant case, the taxpayer's election filed in 1975 and the presumption period applicable thereto were not terminated even though the taxpayer was not engaged in the activity of racing horses as a sole proprietor in 1976. The taxpayer's activity of racing horses as a sole proprietor in 1975 and 1977 are taken into account in applying section 183 of the Code to a period of seven consecutive tax years in which those years are included.